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WAR  BORROWING 


THE  MACMILLAN  COMPANY 

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ATLANTA  •    SAN   FRANCISCO 

MACMILLAN  &  CO.,  Limited 

LONDON  •  BOMBAY  •  CALCUTTA 
MELBOURNB 

THE  MACMILLAN  CO.  OF  CANADA,  Lmt 

TORONTO 


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WAR  BORROWING 

A    STUDY    OF    TREASURY    CERTIFICATES 
OF  INDEBTEDNESS  OF  THE  UNITED  STATES 


BY 
JACOB  H.  HOLLANDER,  Ph.D. 

Professor  of  Political  Economy  in  The  Johns 
Hopkins  University 


THE  MACMILLAN  COMPANY 

1919 


A.II  rights  reserved 


f>  O  ^*   *7    1 


COPTEIOHT,  1919 

By  the  MACMILLAN  COMPANY 


Set  up  and  electrotyped.     Published,  February,  1919 


i 


INTRODUCTION 


This   essay   traces   back   to  a   running  comment 

upon  the  actual  course  of  our  war  financing  made 

day  after  day  to  the  bare  handful  of  students  into 

'^    which  the  Economic  Seminary  of  the  Johns  Hop- 

^     kins   University   had   in   the   early   months   of   the 

'^,     nation's  entry  into  the  great  struggle  swiftly  re- 

"nV;^   solved    itself.     Any    worth    that    the    study    may 

possess  is  thus,  in  the  first  instance,  to  be  shared 

with  this  little  group  since,  to  a  man,  drawn  into 

the  country's  service. 

It  is  never  easy  to  write  critically  of  current  fiscal 

;^,      practices,  least  of  all  when  the  nation's  existence 

\      hangs  in  the  balance.     Many  facts  are  uncollected, 

much   material   may  not  be  made  accessible,   and 

from  first  to  last  the  writer  is  held  and  tied  by  his 

wish  to  help  and  not  hurt.     Yet  if  his  inquiry  is  to 

i    serve  any  present  use,  the  student  cannot  wait  until 

r     present    policies    have    become    historic     records. 

<j    With  the  certainty  of  some  incompleteness,  at  the 

^     risk  of  unfortunate  oversight  or  avoidable  error, 

he  will  offer  that  which  he  has  rather  than  await  the 

comfortable  detail  of  the  full  event. 

This  is  the  mood  in  which  the  present  study  is 
sent  forth.  Sound  and  admirable  in  the  main,  our 
war  borrowing  has  been  marred  here  and  there 
by  serious   error,   injuring  us  now   and  certain  if 


INTRODUCTION 

unamended  to  plague  us  hereafter.  Past  ex- 
perience, theoretical  analysis,  present  evidence  — 
all  point  to  this  conclusion. 

If  anything  here  written  will  hasten,  by  wider 
discussion  and  better  understanding,  a  careful  re- 
examination of  those  phases  of  our  borrowing 
policy  to  which  attention  is  drawn,  the  author's 
venture  may  seem  to  have  been  not  entirely  in  vain 
—  whatever  its  prematurity. 

Baltimore,  November  i,  19 18. 


CONTENTS 

PAGE 

Introduction v 

I     The  Past 3 

II     The  Present 25 

III  The  Treasury 73 

IV  The  Money  Market 109 

V    The  Price  Level 157 

VI     The  Future 195 

Index 213 


THE  PAST 


WAR   BORROWING 

I 

THE  PAST 

A  CAREFUL  historian  of  financial  thought  has  lately 
declared  that  there  are  few  economic  questions  upon 
which  opinion  has  been  so  divided  and  for  so  long  a 
time  as  the  best  method  of  raising  funds  for  the 
conduct  of  war.^  For  two  centuries  and  a  half 
statesmen  and  economists  have  debated  as  to 
whether  in  time  of  war  all  supplies  should  be  raised 
by  taxation  or  some  reliance  should  be  had  upon 
public  credit.  In  the  present  war  this  controversy 
has  been  waged  with  new  intensity  but  with  old-time 
uncertainty.  In  so  far  as  settlement  has  been 
reached  as  to  the  adjustment  of  war  expenditure  be- 
tween taxes  and  loans,  the  formula  has  been  oppor- 
tunist rather  than  definitive. 

Curiously  enough,  the  discussion,^   spirited  and 

1  In  W.  R.  Scott's  admirable  address  to  the  Economic 
Science  Section  of  the  Royal  Philosophical  Society  of  Glas- 
gow on  "Adjustment  of  War  Expenditure  between  Taxes 
and  Loans"  (Glasgow,  1917)  ;  reprinted  in  the  same  author's 
"  Economic  Problems  of  Peace  after  War :  Second  Series " 
(Cambridge,  1918). 

2  See,  for  example,  "  Financing  the  War,"  a  series  of  papers 
in  The  Annals  of  the  American  Academy  of  Political  and 
Social  Science,  January,   1918;   also  "Financial   Mobilization 

3 


4  WAR  BORROWING 

sustained  though  it  has  been,  has  had  to  do  almost 
exclusively  with  the  relative  extent  to  which  public 
borrowing  should  be  used  in  war  finance,  to  the 
virtual  neglect  of  the  particular  manner  in  which 
such  borrowing  should  be  effected.  Interest  rate, 
maturity,  amortization  are  details  of  fiscal  tech- 
nique —  the  determination  of  which  must  in  the  last 
instance  be  left  to  the  financial  administrator.  But 
there  are  larger  and  more  fundamental  problems  of 
war-time  borrowing  which  may  not  be  so  dismissed. 
Shall  the  nation  raise  its  loans  by  long-term  obliga- 
tions absorbed  directly  by  public  subscription? 
Shall  the  borrowing  be  in  the  form  of  temporary 
loans  discharged  or  renewed  from  time  to  time  as 
maturing?  Shall  the  proceeds  of  popular  long-term 
loans  be  anticipated  by  short-term  bank  borrowings  ? 
Each  policy  is  attended  with  distinctive  conse- 
quences, not  only  as  to  the  supply  of  public  funds 
but  as  to  the  wider  effects  upon  national  industry 
and  economic  well-being. 

Upon  one  of  these  courses  —  short-term  borrow- 
ing in  anticipation  of  the  proceeds  of  funded  loans 
—  our  own  country,  following  hard  upon  recent 
European  experience  rather  than  traditional  Ameri- 
can practice,  has  entered.  If  not  unconsciously 
chosen,  there  has  been  at  least  little  public  compre- 
hension of  this  procedure  and  even  less  examination 
of  its  consequences.  The  close  of  the  first  phase 
of  our  war  financing,  with  the  prospect  of  further 
extraordinary  expenditure  imminent  enough  to  jus- 

for  War,"  papers  presented  at  the  joint  conference  of  the 
Western  Economic  Society  and  the  City  Chib  of  Chicago, 
June  21-22,  1917. 


THE  PAST  5 

tify  the  amplest  financial  provision  —  is  a  proper 
time  to  review  our  borrowing  policy  and  to  study  its 
effects,  fiscal,  economic  and  social. 

A  notable  feature  of  the  present  war  financing  of 
the  United  States  has  been  the  large  part  played  by 
Treasury  certificates  of  indebtedness.  In  outright 
volume  the  gross  amount  of  such  certificates  thus 
far  [November  i,  191 8]  issued  has  been  greater  than 
the  principal  sum  of  the  first  three  Liberty  Loans 
and  will  soon  exceed  that  of  the  first  four.  Emitted 
in  short  maturities,  the  actual  amount  of  certificates 
at  any  time  outstanding  —  now  authorized  to  a  max- 
imum of  $8,000,000,000  —  has,  with  a  single  brief 
exception  (July  30-August  9,  191 7)  been  consider- 
able since  our  first  entry  into  the  war,  and  since 
August,  19 1 7,  has  never  been  less,  at  the  close  of 
any  month,  than  $1,250,000,000,  rising  as  high  as 
$3,936,339,500  (April  30,  1918),  with  an  amount 
nominally  outstanding  on  September  30,  1918,  of 
$4,100,000,000.^  The  Treasury  has  made  use  of 
such  certificates  to  anticipate  the  yield  of  war  loans 
and  war  taxes  for  national  defense  and  for  Allies' 
credits,  and  has  prepared  for  continued  reliance 
upon  the  same  expedient.  Finally  the  certificates 
have  been  deemed  capable  of  exerting  important 
influence  upon  the  money  market  and  upon  the  price 

3  Monthly  "  Financial  Statement  of  the  United  States  Gov- 
ernment," formerly  issued  as  "  Statement  of  the  Public  Debt " 
(Division  of  Bookkeeping  and  Warrants,  Treasury  Depart- 
ment). No  statements  were  issued  for  July,  August,  Septem- 
ber and  October,  1917,  and  for  these  months,  a^s  well  as  for 
September,  1918,  the  nominal  aggregates  of  the  outstanding 
issues  have  here  been  used. 


6  WAR  BORROWING 

level,  and  the  efforts  of  the  Treasury  in  harmony 
with  the  Federal  Reserve  Board  have  been  expended 
in  guiding  and  shaping  this  influence. 

The  use  of  short-term  negotiable  obligations  is 
no  new  device  in  the  financial  experience  of  the 
United  States.  Temporary  loans  evidenced  by 
certificates  of  indebtedness  have  served  from  time 
to  time  throughout  our  national  history  to  tide  over 
budget  deficits  or  to  anticipate  future  revenues. 
Morris,  Gallatin,  Chase  and  the  nearer  figures  of 
our  own  decades  are  associated  with  their  emission. 
Recourse  has  been  had  to  such  measures  in  the 
monetary  disorder  of  peace  times  as  in  the  financial 
stress  of  war.  Sometimes  intended  only  for  bank 
absorption,  sometimes  planned  for  general  invest- 
ment, the  issues  have  differed  widely  in  the  tech- 
nique of  amount,  denomination,  maturity,  interest 
yield,  convertibility  and  redemption  as  well  as  in 
the  more  important  elements  of  circulation  and 
privilege. 

The  extraordinary  use  of  certificates  of  indebted- 
ness in  our  present  war  financing  may  not  be  safely 
projected  against  this  background  of  past  experi- 
ence. The  financial  requirements  we  face  and  the 
dislocations  to  which  our  markets  are  exposed  pre- 
sent a  group  of  conditions  so  unparalleled  in  degree 
as  to  be  virtually  new  in  kind.  Moreover,  the 
service  which  the  certificate  is  now  designed  to 
render  is  very  different  from  its  older  function. 
Instead  of  a  temporary  expedient  to  put  the  Treas- 
ury in  funds  for  an  interim  period  until  established 
revenues  from  funded  loans  or  extraordinary  taxes 
become  available  or  until  the  credit  market  recovers 


THE  PAST  7 

from  some  convulsion  that  has  made  normal  financ- 
ing impossible,  the  certificate  of  indebtedness  is  now 
being  used  as  a  recurrent  device  for  effecting  short 
time  borrowing  from  the  banks  and  to  some  extent 
from  investors  in  anticipation  of  the  proceeds  of 
loans  and  taxes,  being  thereafter  funded  into  or 
extinguished  out  of  the  proceeds  of  such  loans  and 
taxes. 

But  withal,  there  are  incidents  in  our  earlier  use 
of  short-term  obligations  that  offer  instruction  in 
the  present  juncture.  We  are  still  far  from  the 
time  wherein  it  will  be  possible  to  estimate  inde- 
pendently the  full  effect  of  our  present  fiscal  policy. 
Until  then  the  procedure  actually  adopted  by  the 
Treasury  in  this  particular  can  profitably  be  ex- 
amined with  regard  to  what  has  heretofore  tran- 
spired, even  though  present  conditions  and  require- 
ments are  very  different. 

The  use  of  the  term  "  treasury  certificate  of  in- 
debtedness " —  in  preference  to  "  treasury  note," 
"treasury  bill,"  "bill  of  credit,"  "United  States 
note  " —  to  designate  an  instrument  of  short-term 
borrowing  is  a  matter  of  statutory  designation  and 
administrative  practice  rather  than  of  judicial  pre- 
cision or  text-book  definition.*  With  regard  to 
fiscal  service  and  economic  effect  as  well  as  to  actual 
employment    in    the    financial    experience    of    the 

*  Even  in  the  present  financing  the  terms  "  certificate  of  in- 
debtedness," "treasury  certificate  of  indebtedness,"  and 
"  United  States  certificate  of  indebtedness "  have  been  used 
more  or  less  indiscriminately  in  the  administrative  texts.  On 
the  whole  " '  treasury  certificate  of  indebtedness '  is  probably 
the  term  most  commonly  used  by  the  treasury  officials" — and 
there  has  been  increasing  disposition  to  formalize  this  term. 


8  WAR  BORROWING 

United  States,  a  Treasury  certificate  of  indebtedness 
may  be  described  as  a  freely  negotiable,  short-term 
government  obligation  —  differing  from  the  evi- 
dence of  a  bank  loan  in  degree  of  negotiability,  from 
a  funded  bond  in  hairdly  anything  more  than  a 
shorter  term  of  maturity,  from  a  demand  note  in 
nominal  non-convertibility  upon  presentation.  In 
addition  to  the  widest  latitude  in  technical  form,  a 
certificate  of  indebtedness  may  bear  interest  or  be 
non-interest  bearing.  It  may  have  a  definite  date  of 
maturity  or  be  payable  or  fundable  at  the  option  of 
the  government  at  any  time  or  after  a  fixed  date. 
It  may  be  made  receivable  for  all  or  for  certain 
public  taxes  or  dues  or  be  made  acceptable  for  specific 
public  payments,  as  bond  subscriptions  or  public 
land  purchases.  It  may  be  secured  as  to  interest 
or  principal  by  assigned  tax  revenues  or  prospective 
loan  proceeds,  or  be  protected  only  by  the  pledge 
of  public  faith.  It  may  be  issued  in  direct  dis- 
charge of  public  accounts  payable  or  be  marketed  or 
hypothecated  as  a  funded  obligation.  It  may  even 
be  vested  with  limited  privileges  of  circulation  or  be 
endowed  with  full  legal  tender  quality. 

In  the  first  century  and  a  quarter  of  our  national 
existence  there  were  six  occasions  on  which  the 
Treasury  had  recourse  to  the  issue  of  short-term 
negotiable  obligations:  (A)  The  War  of  1812, 
(B)  The  Crisis  of  1837,  (C)  The  Mexican  War, 
(D)  The  Crisis  of  1857,  (E)  The  Civil  War  and 
(F)  The  Crisis  of  1907.  In  addition  authority 
was  conferred  but  not  exercised  for  the  issue  of 
certificates  of  indebtedness  in  connection  with  the 


THE  PAST       '  9 

revenue  legislation  of  the  Spanish-American  War. 
Certain  issues  of  short-term  obligations,  otherwise 
designated  but  in  no  manner  different  from  cer- 
tificates of  indebtedness,  are  included  in  the  fore- 
going without  however  permitting  this  extension 
to  justify  the  inclusion  of  other  emissions  made 
under  these  alternate  terms,  of  essentially  different 
character.^  The  detailed  circumstances  attending 
these  several  issues  are  outlined  in  the  standard 
histories  ^  of  our  national  financing,  and  it  will  only 
be  necessary  in  this  connection  to  refer  to  the  salient 
features  which  distinguished  purpose  and  result. 

(A)  With  bitter  experience  in  the  use  of  co- 
lonial and  continental  paper  currencies  fresh  in 
mind,  the  Federal  Convention  of  1789  debated  long 
and  acrimoniously  the  proposal  to  deny  both  States 
and  Union  authority  "  to  emit  bills  of  credit."  '^ 
Eventually  the  States  were  specifically  prohibited, 
and  Congress  was  empowered  only  in  the  general 
grant  "  to  borrow  money  on  the  credit  of  the  United 
States."  An  express  authorization  was  stricken 
from  the  committee  report,  and  the  record  of  the 
accompanying  debate  shows  that  reluctance  "  to  tie 
the  hands  of  the  Legislature  "  as  to  full  borrowing 

5  Thus  the  "  treasury  notes  of  1890,"  issued  under  the  silver 
purchase  clause  of  the  Sherman  Act  of  1890  have  not  been 
included. 

^  Knox,  "  United  States  Notes  "  (third  edition  revised,  New 
York,  1892)  ;  Bayley,  "  History  of  the  National  Loans  of  the 
United  States"  (Tenth  Census  of  the  United  States,  vol.  vii, 
Washington,  1884)  ;  Bullock,  "  Essays  on  the  Monetary  His- 
tory of  the  United  States"  (New  York,  1900);  Dewey,  "Fi- 
nancial History  of  the  United  States"  (New  York,  1903). 

^  Knox,  chap.  i-v. 


lo  WAR  BORROWING 

power  was  perhaps  the  most  important  factor  in 
preventing  outright  prohibition.  The  final  phras- 
ing was  a  compromise  acceptable  to  both  elements 
—  the  one  believing  that  resort  to  such  an  expedient 
was  possible  if  occasion  required  under  the  general 
borrowing  power;  the  other  convinced  that  the 
omission  of  specific  authorization  would  "  shut  and 
bar 'the  door  against  paper  money." 

This  hostility  to  paper  emissions  was  fully 
shared  by  Alexander  Hamilton.  As  a  policy,  he 
maintained  that  "  the  wisdom  of  the  Government 
will  be  shown  in  never  trusting  itself  with  the  use 
of  so  seducing  and  dangerous  an  expedient."  In 
practice,  he  relied  on  temporary  bank  loans  in  an- 
ticipation of  established  revenue  to  extricate  the 
new  Treasury  from  its  inherited  difficulties.  The 
same  deep-rooted  association  in  the  public  mind  of 
bills  of  credit  or  treasury  notes  with  the  excesses 
of  paper  money  continued  for  a  generation  to  dis- 
courage the  use  of  negotiable  instruments  in  connec- 
tion with  temporary  borrowing.  Not  until  the 
War  of  1812  was  recourse  had  to  short-term  obliga- 
tions. A  funded  loan  to  cover  the  war  deficit  had 
met  with  disappointing  public  response,  and  Gallatin 
sought  authority  to  issue  treasury  notes  for  the  un- 
subscribed amount.  In  the  congressional  debate 
which  preceded  the  passage  of  the  act,  the  plan  was 
opposed  "  as  engrafting  on  our  system  of  finances 
a  new  and  untried  measure,"  and  many  of  the 
criticisms  which  the  subsequent  use  of  the  device 
aroused  were  anticipated.^  But  the  situation  was 
deemed  critical  and  the  act  was  passed  and  ap- 
s  Bayley,  pp.  343-5. 


THE  PAST  II 

proved  on  June  30,  1812.  It  empowered  the  Pres- 
ident to  issue  at  par  one-year,  five  and  two-fifths 
per  cent,  treasury  notes  to  an  amount  not  exceeding 
$5,000,000  in  payment  for  suppHes,  in  settlement 
of  debts  and  to  provide  needed  funds.  Such  notes 
were  to  be  receivable  in  discharge  of  duties  and 
taxes  and  in  payment  for  public  lands.  The  full 
amount  authorized  was  issued.  Six  months  later, 
February  25,  181 3,  a  further  issue  of  $5,000,000 
was  authorized  for  the  purpose  of  covering  the  part 
of  the  current  war  deficit  not  met  by  the  $16,- 
000,000  loan  of  1813.  In  March,  1814,  there  was 
a  further  issue  of  $10,000,000;  in  December,  1814, 
an  authorization  of  $10,500,000  of  which  $8,314,- 
400  was  issued,  and  iA  February,  181 5,  an  author- 
ization of  $25,000,000  of  which  $4,969,400  was 
issued  in  $100  denominations  and  $3,392,994  in 
smaller  denominations.^  There  were  thus  in  all 
five  series  of  treasury  notes  authorized  in  1812-15, 
aggregating  $60,500,000,  of  which  $36,680,794 
was  actually  issued. 

(B)  The  second  large  occasion  for  the  issue  of 
treasury  notes  was  the  succession  of  annual  deficits 
which  followed  the  panic  of  1837.^^  The  expend- 
itures of  the  government  had  doubled  in  three  years 
and  there  had  been  actual  shrinkage  in  revenue. 
Between  1837  and  1843  there  was  only  one  year  in 
which  the  Treasury  was  not  face  to  face  with  a 
considerable  deficit.  The  financial  requirement 
was    aggravated    by    monetary    stringency.     The 

3  Knox,  pp.  38--9 ;  Bayley,  349-50. 
i*'  Knox,  chap,  vi ;  Dewey,  chap.  x. 


12  WAR  BORROWING 

charter  of  the  Bank  of  the  United  States  had  ex- 
pired in  1836  and  in  1837  there  was  general  sus- 
pension. To  meet  the  monetary  demand  as  well  as 
to  satisfy  the  financial  deficit  the  issue  of  one-year 
treasury  notes,  bearing  not  more  than  six  per  cent, 
interest  and  in  denominations  not  exceeding  $50, 
was  authorized  in  1837  to  an  amount  not  exceeding 
$10,000,000.  The  notes  were  to  be  issued  in 
optional  payment  of  public  creditors  and  were  re- 
ceivable for  all  taxes  and  dues.  As  issued  a  large 
part  of  the  notes  bore  a  merely  nominal  rate  of  in- 
terest and  were  speedily  presented  in  payment  of 
taxes,  to  that  extent  accomplishing  the  fiscal  and 
failing  the  monetary  purpose  in  view. 

The  precedent  established;  recourse  was  had  from 
1837  to  1844  under  authority  of  eight  successive 
acts  to  no  less  than  thirteen  emissions  —  issues  and 
reissues  —  to  an  aggregate  amount  of  $47,002,900. 
Used  primarily  to  meet  financial  exigencies  in  a 
period  when  neither  bond  issues  nor  bank  loans 
were  regarded  as  feasible,  the  expedient  continued 
to  serve  in  presence  of  a  disordered  and  inelastic 
currency  system  a  monetary  need  as  distinct  from 
a  fiscal  requirement.  So  employed,  the  treasury 
note  was  the  center  of  much  of  the  political  con- 
troversy and  constitutional  debate  which  raged  in 
these  troubled  years  over  the  specie  circular,  the  in- 
dependent treasury  system,  the  organization  of  a 
national  bank,  and  the  emission  of  paper  money. 
The  outcome  was  to  vindicate  the  fiscal  usefulness 
and  to  discredit  anew  the  monetary  effectiveness 
of  the  treasury  note.  By  the  close  of  the  period 
the  distinction  had  been  clearly  made  that :  "  the 


THE  PAST  13 

issue  of  notes  payable  on  demand,  out  of  funds  then 
on  hand,  and  in  the  treasury,  is  totally  different  in 
principle  from  the  issue  of  notes  promising  to  pay 
one  year  after  date,  intended  to  supply  a  present 
deficit  in  the  treasury,  and  to  be  reimbursed  there- 
after out  of  accruing  revenue,"  and  that  "  To  issue 
notes  for  circulation,  payable  on  demand,  under 
cover  of  the  authority  to  borrow  money  in  the  form 
of  treasury  notes,  is  deemed  an  abuse  of  authority 
which  ought  to  be  corrected."  ^^ 

(C)  The  declaration  of  war  against  Mexico  on 
May  13,  1846,  followed  close  upon  the  tariff  reduc- 
tion of  that  year.^2  To  provide  for  the  anticipated 
deficit,  Congress  authorized  an  issue  of  treasury 
notes  and,  alternately  as  to  any  part,  an  issue  of  six 
per  cent,  stock  —  the  amount  of  both  issues  not  to 
exceed  $10,000,000.  The  notes  were  identical  with 
the  1837-42  issues,  the  same  plates  even  being  used 
in  printing  them.  They  were  emitted  in  denomi- 
nations of  not  less  than  $50,  reissuable  within  the 
term  of  maturity.  The  notes  might  be  tendered  in 
direct  payment  of  such  public  creditors  as  would  re- 
ceive them,  or  might  be  used  by  the  Treasury  in 
borrowing  money  to  be  so  applied. 

The  Treasury's  needs  continuing,  the  amount  of 
notes  originally  authorized  was  increased  six. 
months  later  by  $5,000,000,  and  a  second  issue  of 
$23,000,000  of  one  or  two  year  notes  was  au- 
thorized, subject  to  reissue  and  receivable  in  pay- 
ment of  all  public  dues.  The  notes  might  be  called 
upon  sixty  days  notice  and  were  fundable  into  six 
11  Knox,  pp.  S4-6i.  12  Knox,  chap.  vii. 


14  WAR  BORROWING 

per  cent,  bonds.  In  1846-8  there  were  issued,  under 
the  provisions  of  the  act  of  July  22,  1846,  $7,687,- 
800,  and  under  the  provisions  of  the  act  of  January 
28,  1847,  including  reissues,  $26,122,100  —  all 
bearing  interest  at  the  rate  of  five  and  two-fifths  or 
six  per  cent,  with  the  exception  of  $1,766,450  of  the 
earlier  issue  which  bore  a  nominal  rate  of  one  mill 
per  cent,  per  annum. 

(D)  The  crisis  of  1857  and  the  suspension  of 
specie  payments  swiftly  changed  a  comfortable 
treasury  balance  into  the  prospect  of  a  disturbing 
deficit.  ^^  The  established  revenues  would  under 
normal  conditions  have  been  sufficient  to  meet  ex- 
penditures ;  but  the  suspension  of  the  banks  had  been 
followed  by  sharp  contraction  of  business.  Much 
dutiable  merchandise  had  been  placed  in  bond  and 
the  flow  of  current  income  rapidly  dwindled.  To 
tide  over  the  interval,  Congress  on  December  2^^, 
1857,  at  the  request  of  the  Secretary  of  the  Treas- 
ury, authorized  the  issue  of  one-year  treasury 
notes  "  for  such  sum  as  the  exigencies  of  the  public 
service  might  require  "  not  to  exceed  at  any  time 
the  amount  of  $20,000,000.^"*  The  notes  were  to 
be  issued  at  par  in  denominations  of  not  less  than 
$100,  with  interest  at  not  more  than  six  per  cent. 
They  were  to  be  receivable  for  all  public  dues  and 
when  redeemed  might  be  reissued  within  the  period 
of  final  maturity.  The  issue  was  to  be  emitted  in 
two  installments  —  the  first,  to  the  amount  of  $6,- 
000,000  forthwith ;  the  remainder,  by  public  tender 
"  at  their  par  value,  for  specie  to  the  bidders  offer- 

13  Knox,  pp.  70-1.  1*  Bayley,  p.  368. 


THE  PAST  15 

ing  to  take  them  at  the  lowest  rate  of  interest,  not 
exceeding  6  per  cent."  The  entire  sum  authorized 
was  issued,  and  the  amount  of  issues  and  reissues 
in  all  was  $52,778,900  at  rates  of  interest  from  three 
to  six  per  cent.,  emitted  in  denominations  of  not  less 
than  $100.^^ 

(E)  To  discharge  the  treasury  notes,  issued  in 
1857  ^^d  still  outstanding,  Congress  on  June  22, 
i860,  authorized  a  loan  of  $21,000,000  in  ten- 
twenty  years  bonds.^^  A  third  of  the  issue  had 
barely  been  placed  before  the  rumbling  of  the  com- 
ing storm  convulsed  the  money  market  and  the  re- 
mainder of  the  offering  was  withdrawn.  In  lieu 
Congress  in  December,  i860,  authorized  an  issue  of 
one-year  treasury  notes  in  denominations  of  not  less 
than  $50,  to  an  aggregate  amount  not  exceeding 
$10,000,000.  The  notes  were  to  bear  six  per  cent, 
interest ;  but  the  Secretary  of  the  Treasury  was  em- 
powered if  necessary  to  issue  them  after  advertise- 
ment at  such  rates  of  interest  as  might  be  offered 
by  the  lowest  responsible  bidders.  Only  some 
$70,000  were  actually  issued  at  six  per  cent.,  the  re- 
mainder commanding  from  seven  to  twelve  per  cent. 
Nearly  one-half  of  the  $10,000,000  emitted  bore 
twelve  per  cent.,  and  bids  were  actually  received  but 
declined  at  rates  ranging  from  fifteen  to  thirty-six 
per  cent.  In  the  congressional  debate  which  pre- 
ceded the  passage  of  the  enabling  act  an  unsuccess- 
ful attempt  was  made  to  pledge  the  proceeds  of  the 
public  land  sales  for  the  specific  redemption  of  the 
notes,  and  an  endeavor  to  reduce  the  minimum  de- 

15  Knox,  p.  71.  1*' Knox,  chap.  viii. 


i6  WAR  BORROWING 

nomination  from  $ioo  to  $20  resulted  in  a  com- 
promise at  $50. 

A  month  later  the  act  of  March  2,  1861  — the 
first  of  the  emergency  revenue  measures  ^'^  enacted 
on  the  eve  of  a  great  war  to  supply  a  depleted 
treasury  —  authorized  the  President  of  the  United 
States  to  float  a  $io,cxdo,ooo  loan  or,  if  satisfactory 
terms  were  not  obtainable,  to  issue  treasury  notes  in 
lieu  thereof,  and  also  to  substitute  treasury  notes 
for  the  whole  or  any  part  of  the  money  which  he 
was  authorized  to  borrow  by  previous  acts.^*  Such 
notes  were  to  bear  six  per  cent,  interest,  to  be 
emitted  in  denominations  of  not  less  than  $50  and 
to  mature  in  two  years  unless  called  for  earlier 
redemption.  Notes  were  actually  issued  to  the 
amount  of  $35,364,450,  of  which  $22,468,100  was 
redeemable  in  two  years  and  $12,896,350  sixty  days 
after  date. 

With  the  administration  of  Secretary  Chase  the 
older  form  of  short-term  obligations  which  had 
proved  so  ineffective  in  the  first  year  of  the  war  was 
abandoned  for  two  related  expedients:  (a)  inter- 
est bearing  obligations  of  somewhat  longer  term 
as  the  three-years  seven  and  three-tenths  per  cent, 
notes,  and  (b)  non-interest  bearing  demand  notes. ^^ 
Both  of  these  measures  underwent  development. 
The  longer  term  notes  became,  with  improvement  in 
the  investment  market,  funded  loans.  The  non- 
interest  bearing  demand  notes  degenerated  into  the 

17  Knox,  chap.  ix. 
IS  Bayley,  p.  371. 

i»  Mitchell,  "  A  History  of  the  Greenbacks  "  (Chicago,  1903), 
part  I. 


THE  PAST  17 

legal  tender  issues.  Not  only  did  the  historic 
treasury  note  develop  into  new  instruments  but  the 
actual  term,  treasury  note,  came  to  be  associated 
with  one  of  these  newer  devices  instead  of  remain- 
ing identified  with  the  original  expedient.  There- 
after, when  recourse  was  had  to  the  use  of  short- 
term  interest  bearing  obligations,  the  title  treasury 
note  was  associated  in  public  usage  with  legal  tender 
demand  notes  and  the  term  certificate  of  indebted- 
ness was  used  in  lieu  of  the  old  phrase. 

In  February,  1862,  Secretary  Chase,  embarrassed 
by  the  pressure  of  floating  indebtedness,  then  vari- 
ously estimated  at  from  $80,000,000  to  $180,000,- 
000,  sought  and  obtained  authority  from  Congress 
to  issue  to  creditors  who  might  desire  to  receive 
them  certificates  of  indebtedness  bearing  six  per 
cent,  interest  and  payable  in  one  year  or  earlier 
at  the  option  of  the  Government.  Substantial 
amounts  were  issued  during  the  remaining  three 
years  of  the  war  in  payment  of  contractors'  audited 
accounts  and  disbursing  officers'  checks :  $50,000,- 
000  in  1862;  $157,000,000  in  1863;  $169,000,000 
in  1864,  and  $131,000,000  in  1865.  When  re- 
ceived they  were  used  either  as  collateral  for  pro- 
curing bank  loans  or  directly  as  a  form  of  currency. 
Although  circulating  at  a  small  discount  they  passed 
freely  from  hand  to  hand  as  current  funds.  The 
successive  issues  remained  outstanding  for  the  full 
term  of  their  maturities,  being  then  discharged  from 
out  of  general  revenue.  At  the  end  of  the  fiscal 
year  1866  only  $26,400,000  of  such  certificates  were 
outstanding  and  these  were  paid  off  in  the  next 
twelve  months. 


i8  WAR  BORROWING 

(F)  No  recourse  was  had  to  certificates  of 
indebtedness  from  the  Civil  War  to  the  revenue 
legislation  of  the  Spanish-American  War.  The 
war  revenue  act  of  June  13,  1898,  empowered  the 
Secretary  of  the  Treasury  to  issue  certificates  of  in- 
debtedness in  denominations  of  $50  and  multiples, 
bearing  not  more  than  three  per  cent,  interest  nor 
of  more  than  one  year  maturity  and  limited  to  a 
total  outstanding  volume  not  exceeding  $100,000,- 
000.  The  obvious  intention  was  that  such  short- 
term  borrowing  should  meet  the  Treasury's  extraor- 
dinary needs  until  the  proceeds  of  war  taxes  and 
loans  became  available.  As  a  matter  of  fact,  the 
prompt  issue  and  immediate  success  ^^  of  the  war 
loan  made  it  unnecessary  to  issue  any  of  the  cer- 
tificates. The  enabling  act  itself  however  remained 
upon  the  statute  books  conferring  permissive  au- 
thority upon  the  Secretary  of  the  Treasury,  and  be- 
came eventually  the  nucleus  of  later  authorization 
of  short-term  borrowing. 

The  panic  of  1907  was  the  occasion  of  the  final 
issue  of  certificates  of  indebtedness  prior  to  the 
present  war.-^  To  relieve  the  acute  monetary 
stringency,  the  Treasury  transferred  to  the  banks 
as  public  deposits  all  available  funds,  so  that  by  the 
middle  of  November  tjie  available  working  balance 
had  been  reduced  to  approximately  $5,000,000, 
making  impossible  further  relief  from  this  quarter. 
Efforts  were  now  directed  to  induce  the  banks  — 
"  hampered  by  the  scarcity  of  bonds  and  the  rapid 

^"  Commercial  and  Financial  Chronicle,  July  16,  i8q8. 
21  Report  of  Secretary  of  Treasury,  1908,  p.  21 ;  Report  of 
Treasurer  of  United  States,  1908,  p.  154. 


THE  PAST  19 

advance  in  their  price" — to  take  out  additional 
note  circulation.^-  The  Treasury  op  November  17, 
1907,  announced  that  bids  would  be  received  for  an 
issue  of  $50,000,000  Panama  Canal  bonds  under  the 
act  of  June  28,  1902,  and  $100,000,000  three  per 
cent,  certificates  of  indebtedness  under  the  act  of 
June  13,  1898  —  both  to  be  available  for  note  cir- 
culation. The  Treasury  further  announced  its  in- 
tention of  permitting  90  per  cent,  of  the  proceeds 
of  the  bonds  and  75  per  cent,  of  the  proceeds  of  the 
certificates  to  remain  as  public  deposits  in  depositary 
banks. 

The  mere  announcement  brought  the  desired  re- 
lief. It  was  ultimately  found  necessary  to  issue 
only  $24,631,980  of  the  Panama  bonds  and  $15,- 
436,500  of  the  certificates  of  indebtedness.  The 
certificates  were  almost  wholly  absorbed  by  the 
banks  and  were  used  for  increasing  circulation  or 
for  securing  public  deposits.  Of  the  total  amount 
issued,  there  were  purchased  by  the  Treasury  at  par 
and  interest  $1,250,000  on  March  3,  1908,  and 
$250,000  on  September  14,  1908.  The  remaining 
$13,936,500  were  called  for  redemption  at  maturity 
on  November  20,  1910.^^ 

In  summary,  it  appears  that  of  the  six  occasions 
upon  which,  prior  to  the  present  war,  the  Treasury 
made  use  of  negotiable  short-term  debt  obligations, 
the  first  four — 1812-15,  1837-42,  1846,  1857 — ■ 
developed  from  inability  to  sell  long  term  bonds  in 

22  Report  of  Secretary  of  Treasury,  1908,  p.  21. 
-^  Report  of  Treasurer  of  United  States,  IQ08,  p.  1^2,  IQ09.  p. 
137- 


20  WAR  BORROWING 

sufficient  amount  to  meet  pressing  requirements  in 
periods  of  impending  war  or  acute  monetary  dis- 
turbance unrelieved  by  adequate  banking  facilities. 
Whatever  effectiveness  such  expedients  possessed 
was  largely  a  consequence  of  their  use  not  as  formal 
borrowing  devices,  but  —  after  the  manner  of  the 
continental  bills  of  credit  —  as  fiat  emissions  for 
direct  payment  of  public  accounts.  Whether  the 
fiscal  exigency  was  in  each  case  desperate  enough 
to  justify  such  a  policy  with  its  reasonably  certain 
accompaniments,  if  sufficiently  pursued,  of  inflation 
and  depreciation  is  a  problem  which  at  this  late  day, 
with  scanty  statistical  evidence,  practically  defies 
solution.  So  utilized,  the  short-term  obligation  be- 
came an  insecure  make-shift,  inviting  return  of  the 
very  consequences  which  the  framers  of  the  con- 
stitution in  the  fullness  of  experience  had  sought  to 
avert  by  discountenancing  the  emission  of  bills  of 
credit.  At  best,  it  served  as  a  last  resort  of  a 
strained  treasury  unsupported  by  adequate  credit 
agencies. 

The  short-term  issues  of  the  Civil  War  were 
largely  a  result  of  Secretary  Chase's  opposition  to 
long-term  bonds,  heightened  by  his  reluctance  to 
adjust  the  interest  yield  of  funded  loans  to  the  pre- 
vailing rate  of  the  money  market.  In  fiscal  effect 
the  use  of  such  "  temporary  obligations  falling  due 
in  the  midst  of  civil  conflict  "  has  been  fairly  de- 
scribed as  "  a  source  of  double  vexation  to  the 
treasury  department,  which  was  obliged  to  conduct 
a  series  of  refunding  operations,  and  at  the  same 
time  to  go  into  the  money  market  to  borrow  ever 
increasing  sums  for  a  war  which  apparently  would 


THE  PAST  21 

never  end."  In  economic  effect,  their  service  as 
currency  "  expanded  prices,  and  increased  the  spec- 
ulation and  extravagance  always  incident  to 
war."  24 

There  remain  the  authorization  of  1898  and  the 
emission  of  1907.  Of  these  the  issue  of  1907  was 
ag^ain  monetary  rather  than  fiscal  in  character  —  a 
consequence  less  of  a  depleted  treasury  than  of  a 
rigid  bond  secured  circulation,  whereby  an  acutely 
strained  credit  market  sought  relief  in  otherwise 
unnecessary  debt  creation.  Only  in  the  Spanish- 
American  War  authorization  of  1898  did  the 
Treasury  contemplate  a  short  time  negotiable  obli- 
gation in  the  manner  familiar  to  fiscal  practice  and 
sanctioned  by  fiscal  theory  —  anticipation  of  the 
proceeds  of  a  funded  loan  designed  to  meet  extra- 
ordinary expenditures. 

2* Dewey,  "Financial  History  of  the  United  States,"  p.  317. 


THE  PRESENT 


II 

THE  PRESENT 

In  the  financing  of  the  present  war,  the  United 
States  has  made  use  of  negotiable  short-term  debt 
obHgations,  under  the  designation  of  "  Treasury 
certificates  of  indebtedness,"  from  the  preparatory 
tneasures  taken  before  the  actual  declaration  of 
hostilities,  through  the  first  anniversary  of  entry 
into  the  struggle,  up  to  the  present  time  of  writing 
[November  i,  191 8].  There  have  been  in  this 
period,  thirty-one  issues  of  certificates  offered  by 
the  Treasury  through  the  Federal  Reserve  Banks 
for  general  subscription  by  banks  and  individuals.  ^ 
In  addition  the  Federal  Reserve  Banks  have  on 
various  occasions  made  temporary  loans  to  the 
Treasury,  "  to  avoid  constant  withdrawals  of  gov- 
ernment funds  on  deposit  with  depositary  banks," 
by  the  direct  purchase  of  certificates  of  indebtedness 
payable  within  a  few  days  and  bearing  interest  at 
from  two  to   four  per  cent.^     In  the   following  ^ 

1  See  below  p.  28  as  to  the  ante-bellum  issue  of  March 
31,  1917,  herein  included. 

2  "  Fourth  Annual  Report  of  the  Federal  Reserve  Board " 
(Washington,  1918),  pp.  265,  277. 

3  In  a  note  on  "  Certificates  of  Indebtedness  in  our  War 
Financing  "  in  The  Journal  of  Political  Economy,  November, 
1918,  the  present  writer  has  summarized  the  course  of  cer- 
tificate borrowing  down  to  June  i,  1918,  in  the  manner  of  the 
present  chapter. 

25 


26 


WAR  BORROWING 


table,  the  essential  features  of  the  thirty-one  formal 
issues  are  summarized : 


Interest 

Datec 

f 

Nominal 

Series 

*   Date 

of  Issue 

Rate 

Matur 

ty 

Amount 

I] 

Mar. 

31. 

1917 

2 

June 

29, 

1917 

$50,000,000 

2 

Apr. 

25, 

1917 

3 

June 

30, 

1917 

268,205,000 

.1 

May 

10, 

1917 

3 

July 

17, 

1917 

200,000,000 

4 

May 

25, 

1917 

3^ 

July 

30, 

1917 

200,000,000 

5 

June 

8, 

1917 

3^ 

July 

30, 

1917 

200,000,000 

6 

Aug. 

9, 

191 7 

3K2 

Nov. 

15, 

1917 

300,000,000 

7 

Aug. 

28, 

1917 

3V2 

Nov. 

30, 

1917 

250,000,000 

8 

Sept. 

17, 

1917 

3V2 

Dec. 

15, 

1917 

300,000,000 

[9 

Sept. 

26, 

1917 

4 

Dec. 

15. 

1917 

400,000,000 

lo' 

Oct. 

18, 

1917 

4 

Nov. 

22, 

1917 

385,197,000 

II 

Oct. 

24, 

1917 

4 

Dec. 

15. 

1917 

685,296,000 

12 

Nov. 

30, 

1917 

4 

June 

25, 

1918 

691,872,000 

13 

Jan. 

2, 

1918 

4 

June 

25. 

1918 

491,822,500 

14 

Jan. 

22, 

1918 

4 

Apr. 

22, 

1918 

400,000,000 

15 

Feb. 

8, 

1918 

4 

May 

9, 

1918 

500,000,000 

[i6 

Feb. 

15, 

1918 

4 

June 

25. 

1918 

74,100,000 

[17 

Feb. 

27, 

1918 

4/2 

May 

28, 

1918 

500,000,000 

ri8 

Mar. 

15, 

1918 

4 

June 

25, 

1918 

1 10,962,000 

19 

Mar. 

20, 

1918 

4^ 

June 

18, 

1918 

543,032,500 

20 

Apr. 

ID, 

1918 

4/2 

July 

9, 

1918 

551,226,500 

[21 

Apr. 

15. 

1918 

4 

June 

25, 

1918 

71,880,000 

[22 

Apr. 

22, 

1918 

4^ 

July 

18, 

1918 

517,826,500 

23 

May 

15, 

1918 

4 

June 

25, 

1918 

183,767,000 

24 

June 

25, 

1918 

4/3 

Oct. 

24, 

1918 

839,646,500 

25 

July 

9, 

1918 

4/2 

Nov. 

7, 

1918 

759,938,000 

26 

July 

2.1, 

1918 

4/2 

Nov. 

21, 

1918 

584,750.500 

27 

]     Aug. 

6, 

1918 

4K2 

Dec. 

5, 

1918 

575.706,500 

281 

Aug. 

20, 

1918 

4 

July 

15, 

1919 

157.552.500 

291 

Sept. 

3, 

1918 

4/2 

Jan. 

2, 

1919 

639,493,000 

30 

Sept. 

17. 

1918 

A'A 

Jan. 

16, 

1919 

625,216,500 

[31 

Oct. 

I, 

1918 

4/2 

Jan. 

30, 

1919 

641,069,000 

*  The  bracketed  numerals  are  used  merely  to  distinguish  the 
issues  in  the  present  study.  As  a  matter  of  fact  "  Only  a  few 
of  the  issues  had  serial  letters  and  numbers  printed  on  the  cer- 
tificates, the  other  issues  being  without  any  serial  designation." 
The  certificates  in  anticipation  of  the  Fourth  Liberty  Loan 
have  been  designated  by  the  Treasury  as  Series  IV,  and  the 
successive  issues  distinguished  by  serial  letters. 

^  Lip  to  the  close  of  the  issue  on  November  6,  1918. 


THE  PRESENT  27 

In  purpose  the  thirty-one  series  may  be  arranged 
in  seven  groups  as  follows: 

Series                                    In  anticipation  of :  Nominal  amount 

(A)  [i]    1917  Income  Tax  $     50,000,000 

(B)  [2]  [3]  [4]    [5]    ...  First  Liberty  Loan  868,205,000 

(C)  [6]  [7]  [8]  [9]  [10] 

[11]    Second  Liberty  Loan        2,320,493,000 

(D)  [12]  [13]  [16]  [18] 

[21]  [23]   1918  Income  and  Excess 

Profits  Taxes  1,624,403,500 

(E)  [J4]  [15']  [17]  [19] 

[20]  [22]     Third  Liberty  Loan  3,012,085,500 

(F)  [24]  [25]  [26]  [27] 

[29]  [30]  [31]    ..  Fourth  Liberty  Loan         4,659,820,000 

(G)  [28]    1919  Income  and  Excess 

Profits  Taxes  i57,552,50o 

The  circumstances  attending  these  successive 
issues  may  be  briefly  reviewed : 

(A)  The  early  entry  of  the  United  States  into 
the  war  was  foreshadowed  in  the  recommendation 
of  the  Ways  and  Means  Committee  of  the  House  of 
Representatives  in  the  report  accompanying  the 
revenue  bill  of  March  3,  1917,  that  inasmuch  as 
"  under  the  present  system  of  taxation  a  consider- 
able portion  of  the  receipts  are  not  due  and  pay- 
able until  the  last  month  of  each  fiscal  year  " —  the 
existing  authority  of  the  Secretary  of  the  Treasury 
to  issue  certificates  of  indebtedness  with  a  view  to 
anticipating  public  revenues  should  be  enlarged. 
A  little  noticed  section  of  the  Payne-Aldrich  tariff 
act  of  August  5,  1909,  had  reenacted  the  certificate 
of  indebtedness  provision  of  the  Spanish  War  rev- 
enue act,  with  the  maximum  amount  of  such  certifi- 
cates which  might  at  any  time  be  outstanding  in- 
creased  from  $100,000,000   to  $200,000,000.     As 


28  WAR  BORROWING 

passed  the  revenue  act  of  March  3,  19 17,  em- 
powered the  Secretary  of  the  Treasury  to  borrow 
from  time  to  time  **  such  sum  or  sums  as,  in  his 
judgment,  may  be  necessary  to  meet  public  ex- 
penditures, and  to  issue  therefor  certificates  of  in- 
debtedness in  such  form  and  in  such  denominations 
as  he  may  prescribe."  The  rate  of  interest  to  be 
paid  might  not  exceed  three  per  cent. ;  the  period 
of  maturity,  one  year ;  and  the  sum  at  any  time  out- 
standing, $300,000,000.  The  provision  Hmiting 
the  denomination  of  the  certificates  to  a  minimum 
of  $50  present  in  the  older  acts  of  1898  and  1909  — 
a  curious  reminder  of  the  lapse  of  the  certificate  of 
indebtedness  into  a  circulating  bill  of  credit  in  times 
past  —  was  omitted ;  but  there  seems  no  reason  to 
suppose  that  this  omission,  fraught  with  hypotheti- 
cal possibilities,  had  in  view  any  other  purpose  than 
the  wider  discretion  of  the  Secretary  of  the 
Treasury. 

Under  this  authority,  "  in  anticipation  of  the  cor- 
poration and  individual  income  taxes  due  in  June, 
19 1 7,"  the  Treasury  on  March  27,  19 17,  borrowed 
$50,000,000  from  the  twelve  Federal  Reserve  Banks 
by  an  issue  of  two  per  cent.,  ninety  days  certificates 
of  indebtedness.  The  operation  was  carried  out  by 
direct  purchase  on  the  part  of  the  Banks  as  fiscal 
agents  of  the  Government  summoned  to  invest  in 
short-term  obligations  issued  in  anticipation  of 
revenue.  The  total  amount  subscribed  was  $66,- 
650,000,  of  which  $50,000,000  was  actually  allot- 
ted.« 

^  See  Commercial  and  Financial  Chronicle,  March  31,  1917, 
p.  1209,  for  text  of  offering. 


THE  PRESENT  29 

The  certificates  so  acquired  were  paid  for  by  the 
creation  of  government  deposits  in  the  form  of 
credit  accounts,  and  were  held  by  the  Federal  Re- 
serve Banks  as  investments  until  maturity^  In 
this  respect  the  emission  differed  from  all  succeed- 
ing issues.  It  was  neither  distributed  among  the 
member  banks  nor  made  available  for  the  remittance 
of  Liberty  Loan  subscriptions  nor  for  the  payment 
of  public  dues,  but  figured  as  an  extraordinary 
short-term  loan  made  by  the  Treasury  of  its  fiscal 
agents  at  a  favorable  rate  in  anticipation  of  estab- 
lished revenue.  The  Secretary  of  the  Treasury 
could  with  propriety  speak  of  the  completed  opera- 
tion as  affording  "  an  additional  demonstration  of 
the  usefulness  of  the  new  Reserve  System  to  the 
country."  * 

(B)  In  announcing  the  over-subscription  of 
the  certificate  issue  of  March  31,  19 17,  the  Secre- 
tary of  the  Treasury  intimated  that  an  additional 
$50,000,000  of  "  these  temporary  certificates  of  in- 
debtedness "  might  be  issued  before  the  end  of  the 
fiscal  year  —  adding  significantly  that  no  state- 
ment could  "  be  made  about  possible  issues  of  Gov- 
ernment bonds  until  further  developments  in  the  in- 

^  There  was  some  criticism  that  the  low  interest  yield  of  the 
certificates  prevented  the  Federal  Revenue  Banks  from  dispos- 
ing of  the  certificates  to  investors  and  thus  impaired  the  liquid 
quality  of  the  Banks'  resources  (Commercial  and  Financial 
Chronicle,  March  31,  1917,  p.  1210)  ;  but  there  is  no  evidence 
that  the  Federal  Reserve  Banks  had  at  this  time  any  such  in- 
tention (see  also  Secretary  of  the  Treasury's  statement  of 
April  20,  1917,  in  Federal  Reserve  Bulletin,  May,  1917,  pp.  341- 
2). 

*  Federal  Reserve  Bulletin,  April,  1917,  p.  240. 


30  WAR  BORROWING 

teraational  situation."^  In  the  succeeding  fort- 
night history  moved  swiftly.  On  March  21,  19 17, 
President  Wilson  had  called  Congress  in  special  ses- 
sion two  weeks  earlier  than  originally  proposed  "  to 
receive  a  communication  concerning  grave  matters 
of  national  policy."  On  April  6,  1917,  a  joint  reso- 
lution was  passed  by  Congress  declaring  that  a  state 
of  war  with  the  Imperial  German  Government  had 
been  forced  upon  the  United  States. 

In  these  weeks  the  policy  of  the  Treasury  with 
respect  to  the  huge  borrowings  which  were  then  im- 
mediately imminent  may  be  supposed  to  have 
crystallized.  No  information  is  available  as  to  the 
manner  in  which  the  determination  was  reached, 
and  we  are  left  in  doubt  in  how  far  the  counsels  of 
the  Federal  Reserve  Board,  intent  upon  avoiding 
monetary  strain,  prevailed ;  in  how  far  the  fiscal  ex- 
periences of  the  Allies  were  considered;  in  how 
far  an  independent  program,  inspired  by  the  sheer 
course  of  events,  was  formulated.  Certainly  the 
procedure  adopted  can  fairly  be  described  in  the 
light  of  our  own  financial  history  as  a  new  policy, 
approximating  from  the  outset  the  European  and 
notably  the  English  rather  than  the  American  sys- 
tem of  funding  and  tending  with  the  progress  of 
borrowing  to  conform  more  and  more  closely  to 
English  practice  —  then  still  in  vogue  but  destined 
soon  to  be  abandoned. 

The  characteristic  feature  of  this  new  policy  was 
the  supply  of  treasury  funds  by  the  systematic  use 
of  certificates  of  indebtedness  for  short  term  bor- 

*  Commercial  and  Financial   Chronicle,  March  31,   1918,  p. 
1209. 


THE  PRESENT  31 

rowings,  primarily  from  the  member  banks  of  the 
Federal  Reserve  System  but  to  the  extent  possible 
from  investors  —  such  floating  indebtedness  being 
liquidated  by  the  issue  at  intervals  of  long-term 
funded  loans.  The  certificate  of  indebtedness  be- 
came thus,  not  like  the  contemplated  issue  of  the 
Spanish-American  War,  an  initial  expedient  to  put 
the  Treasury  in  funds  until  the  proceeds  of  newly 
authorized  loans  and  taxes  became  available,  but  an 
habitual  borrowing  device  analogous  to  but  not 
identical  with  the  treasury  bill  of  English  finance. 
Giving  way  periodically  to  a  funding  or  liquidating 
loan,  the  certificate  of  indebtedness  was  resorted  to 
promptly  thereafter  in  renewal  of  the  borrowing 
cycle. 

There  was  no  formal  statement  as  to  the  larger 
purpose  which  the  certificate  of  indebtedness  was 
designed  to  serv^e.  The  report  of  the  Ways  and 
Means  Committee  accompanying  the  introduction 
of  the  Liberty  Loan  bill  in  the  House  of  Repre- 
sentatives merely  set  forth  that : 

"  In  view  of  the  fact  that  a  very  large  portion  of  the 
taxes  now  levied  and  proposed  to  be  levied  at  a  future 
date  will  be  payable  yearly,  and  therefore  will  not  be 
capable  of  yielding  a  continual  flow  of  revenue  into  the 
Treasury,  your  committee  deem  it  advisable  to  recom- 
mend the  authorization  of  the  issuance  of  $2,000,000,000 
worth  of  certificates  of  indebtedness,  payable  within  one 
year,  to  the  end  that  the  Treasury  may  at  all  times  have 
ample  means  of  securing  funds  to  meet  the  immediate 
needs  of  the  Government." 

This  intention  was  repeated  in  the  announcement 
of  the  Secretary  of  the  Treasury  on  April  20,  19 17, 
that: 


32  WAR  BORROWING 

"  As  soon  as  the  war  loan  bill  becomes  a  law  he  intends 
to  sell  such  amounts  of  Treasury  certificates  of  indebted- 
ness as  may  be  necessary  to  meet  the  requirements  of  the 
Treasury  and  the  war  situation  pending  the  sale  of 
Government  bonds  " —  [for  which]  "  about  60  days " 
[would  probably  be  required].^" 

The  First  Liberty  Loan  act  of  April  24,  1917, 
authorized  the  issue  of  certificates  of  indebtedness 
so  foreshadowed  upon  a  scale  commensurate  with 
the  titanic  financing  then  inaugurated.  The  Secre- 
tary of  the  Treasury  was  empowered  "  to  borrow 
from  time  to  time,  on  the  credit  of  the  United 
States,  for  the  purpose  of  this  act  and  to  meet  public 
expenditures  authorized  by  law  such  sum  or  sums 
as,  in  his  judgment  may  be  necessary  "  by  the  issue 
of  certificates  of  indebtedness  bearing  not  more 
than  three  and  a  half  per  cent,  interest  nor  of  more 
than  one  year  maturity  —  up  to  an  amount  of  $2,- 
000,000,000  at  any  one  time  outstanding.  Such 
certificates  were  not  to  bear  the  circulation  privilege 
but  were  exempt  from  all  taxation  other  than  estate 
or  inheritance  taxes.  The  provisions  of  the  act  as 
to  the  custody  of  the  funds  so  borrowed  were  all- 
important:  (a)  the  Secretary  of  the  Treasury  was 
authorized  to  deposit  in  banks  and  trust  companies 
duly  qualified  as  government  depositaries  the  pro- 
ceeds arising  from  the  sale  of  certificates  and  bonds 
to  amounts  not  exceeding,  in  the  case  of  each  de- 
positary, the  sum  invested  by  it  or  withdrawn  from 
it  for  investment  in  certificates  and  bonds;  and 
(b)  the  reserve  requirements  as  to  demand  deposits 
imposed  by  the  Federal  Reserve  Act  were  waived  as 

10  Federal  Reserve  Bulletin,  May,  1917,  p.  342. 


THE  PRESENT  33 

to  deposits  of  government  funds  in  qualified  de- 
positaries.^^ 

The  provisions  of  the  enabhng  act  were  supple- 
mented by  administrative  action.  The  Federal  Re- 
serve Banks  "  as  holders  of  the  liquid  cash  resources 
of  the  nation  "  were  not  to  absorb  such  certificates  as 
direct  investments,  as  in  the  case  of  the  preceding 
issue,  but  to  act  as  distributors  in  placing  the  cer- 
tificates among  the  member  banks  and  trust  com- 
panies in  their  respective  districts.  To  the  end  of 
"  relieving  the  money  market  from  the  strain  of 
heavy  loan  subscription  payments,"  member  banks 
and  financial  institutions  generally  were  authorized 
and  urged  to  employ  certificates  in  payment  of 
Liberty  Loan  subscriptions  made  by  them  directly 
or  in  remitting  the  funds  for  subscriptions  made 
through  them  as  agents.  Finally,  the  Secretary  of 
the  Treasury  announced  that  "  in  the  financial  oper- 
ations in  which  the  Government  is  about  to  engage  it 
will  be  his  purpose  to  adjust  receipts  and  disburse- 
ments in  such  a  way  that  as  far  as  possible  money 
paid  in  will  be  promptly  returned  to  the  market."^^ 

Between  April  25  and  June  8  the  Treasury 
issued  four  series  of  certificates  of  indebtedness  at 
fortnightly  intervals.  The  first  two  series  bore 
three  per  cent,  interest;  the  others,  three  and  a 
quarter.  The  nominal  amount  of  each  series  was 
$200,000,000;  but  over-subscription  of  the  first 
issue  led  to  actual  allotment  of  $268,205,000,  after 
which  the  amount  offered  in  each  issue  was  not  ex- 
ceeded  in   allotment.     The  maturities   were   sixty 

^^  See  p.  126,  below. 

^^  Federal  Reserve  Bulletin,  May,  1917,  p.  342. 


34  WAR  BORROWING 

days,  with  a  shorter  term  for  the  issue  of  June  8.  In 
absorption,  the  response  of  the  interior  was  sub- 
stantial and  eventually  nearly  one-half  of  the  issue 
was  placed  outside  of  the  New  York  District.  Ef- 
forts were  made  by  the  Treasury  to  encourage  a 
quasi-investment  purchase  of  certificates  by  indi- 
viduals and  corporations  in  anticipation  of  loan 
subscriptions;  but  it  is  not  apparent  that  a  large 
measure  of  success  attended  the  endeavor. 

Payment  for  these  issues  was  made  by  subscrib- 
ing banks  in  current  funds.  In  interesting  contrast 
to  the  different  procedure  subsequently  adopted, 
this  mode  of  cash  payment  was  at  the  time  regarded 
as  one  of  the  important  advantages  of  certificate 
borrowing : 

"  By  the  adoption  of  this  policy  of  gradual  issue  of 
short-term  certificates  the  Treasury  receives  a  regular 
flow  of  funds  which  are  transferred  to  it  from  the  banks 
and  individuals  who  take  up  the  certificates,  the  moneys 
thus  coming  in  being  steadily  applied  to  the  requirements 
of  the  Government  in  various  directions.  As  the  certifi- 
cates are  receivable  in  payment  for  subscriptions  to  the 
long-term  bonds  when  prepared,  it  is  thus  possible  to 
draw  ofif  from  the  market  a  portion  of  the  available  funds, 
which  are  then  expended  and  returned  to  commercial 
channels  practically  as  received,  thereby  avoiding  consid- 
erable withdrawals  at  any  one  time  and  making  the  loan 
operation  a  gradual  process  of  withdrawal  of  funds  which 
are  subsequently  funded  into  the  new  bonds.  Subscrip- 
tions for  the  certificates  naturally  come  primarily  from  the 
banks,  which  are  thus  given  a  short-term  investment  for 
their  spare  funds  while  they  are  sure  of  reimbursements 
out  of  the  proceeds  of  the  long-term  securities,  within 
60  days  or  less."  ^^ 

^^  Federal  Reserve  Bulletin,  June,  1917,  p.  424. 


THE  PRESENT  35 

The  nominal  aggregate  of  the  four  issues  in  an- 
ticipation of  the  First  Liberty  Loan  was  $868,205,- 
000.  This  amount  remained  outstanding  until  June 
30,  when  the  issue  of  April  25  matured  leaving  the 
nominal  amount  outstanding  $600,000,000.  Dur- 
ing the  succeeding  two  months,  the  Treasury's  needs 
were  supplied  by  the  unexpectedly  large  overpay- 
ment in  settlement  of  the  early  Liberty  Loan  sub- 
scription installments.  On  July  30,  19 17,  the  last 
of  the  outstanding  certificates  matured  and  were 
paid  off,  leaving  the  Treasury  free  from  certificate 
indebtedness. 

(C)  The  interval  was  brief.  Ten  days  later, 
on  August  9,  19 1 7,  short-term  borrowing,  nominally 
in  anticipation  of  a  Second  Liberty  Loan,  was  re- 
sumed. The  intention  of  the  Treasury  as  to  the 
near  future  was  set  forth  in  detail : 

"  It  is  expected  that  certificates  of  indebtedness  will  be 
issued  from  time  to  time  somewhat  in  advance  of  the 
immediate  requirements  of  the  United  States.  The  pri- 
mary object  of  this  is  to  avoid  the  financial  stress  which 
would  result  from  the  concentration  of  the  payments  for 
a  great  bond  issue  upon  a  single  day  (which  can  not  be 
avoided  wholly  by  provision  for  payment  by  installments 
as  a  great  proportion  of  subscribers  prefer  to  make  pay- 
ment in  full  on  one  day  as  a  matter  of  convenience.)  "  ^* 

Although  the  avoidance  of  monetary  strain  in 
connection  with  the  loan  flotation  was  thus  em- 
phasized as  the  purpose  of  the  renewed  certificate 
borrowing,  it  is  probable  that  the  provision  of  ad- 
ditional  funds  could  not   in  any  event  have  been 

1*  Treasury  statement  of  August  19,  1917,  in  Federal  Re- 
serve Bulletin,  September,  1917,  p.  664. 


36  WAR  BORROWING 

long  delayed.  Early  in  August  the  Treasury  bal- 
ance had  fallen  below  $300,000,000,  with  substan- 
tial requirements  in  sight  and  no  extraordinary 
revenue  available. 

In  the  six  weeks  elapsing  until  the  passage  of  the 
Second  Liberty  Loan  act,  the  Treasury  allotted 
three  issues  of  certificates:  $300,000,000  on  August 
9,  payable  November  15;  $250,000,000  on  August 
28,  payable  November  30;  and  $300,000,000  on 
September  17,  payable  on  December  15.  The  inter- 
est rate  of  the  new  issues  was  raised  to  three  and  a 
half  per  cent.,  corresponding  to  the  yield  of  the 
First  Liberty  Loan.  The  certificates  were  specifi- 
cally made  acceptable  at  par  and  interest  if  ten- 
dered in  payment  of  the  first  installment  on  account 
of  the  Second  Liberty  Loan,  and  each  series  was 
subject  to  redemption  as  a  whole  upon  ten  days 
notice  on  or  after  the  date  set  for  the  payment  of 
such  first  installment. 

In  mode  of  issue,  the  emission  of  August  9  was 
identical  with  those  that  had  preceded.  Payments 
for  certificates  allotted  were  made  by  subscribing 
banks  to  the  Federal  Reserve  Banks  in  cash  or 
current  exchange,  and  the  proceeds  were  there- 
after redeposited  with  subscribing  banks  duly  quali- 
fied as  government  depositaries.  In  connection 
with  the  flotation  of  the  First  Liberty  Loan,  the 
Treasury  "  to  avoid,  even  temporarily,  a  derange- 
ment of  the  money  market "  had  on  May  16,  1917, 
authorized  banks  and  trust  companies  having  pay- 
ments to  make  on  account  of  subscriptions  for 
$100,000  or  more  bonds,  and  duly  qualified  as 
public   depositaries   to   make   payment   upon   such 


THE  PRESENT  37 

subscription  on  June  28,  19 17,  as  to  any  amounts 
not  paid  in  Treasury  certificates  of  indebtedness  "  by 
credit  on  their  books  to  the  account  of  the  Treasurer 
of  the  United  States."  This  procedure  had  been 
foreshadowed  in  the  mode  of  payment  used  by  the 
Federal  Reserve  Banks  for  the  ante-bellum  certifi- 
cate issue  of  March  31,  and  had  been  actually  em- 
ployed with  results  of  the  utmost  significance  in  con- 
nection with  the  overpayment  of  the  installment  of 
June  28,  1917,  on  account  of  the  First  Liberty  Loan. 

The  device  of  permissive  payment  "  by  credit " 
was  apparently  extended  by  administrative  toler- 
ance of  the  Treasury,  to  settlement  for  certificates 
of  indebtedness  acquired  by  or  through  incorpor- 
ated banks  and  trust  companies  after  August  28, 
1917  —  that  is,  with  respect  to  the  issue  of  August 
29,  19 1 7,  and  succeeding  issues.  Thenceforth 
qualified  depositaries  were  permitted  to  make  pay- 
ment "  by  credit "  for  certificates  allotted  to  them 
for  themselves  and  their  customers  up  to  the  amount 
for  which  each  had  qualified.  Subscribing  banks 
not  fully  qualified  as  depositaries  were  required  to 
make  payment  for  certificates  by  cash  and  current 
exchange;  but  in  such  instances  the  Treasury  un- 
dertook to  re-deposit  unexpended  proceeds  in  pro- 
portion to  subscriptions,  as  promptly  as  depositary 
qualification  was  completed. 

This  modification  in  procedure  —  invested  with 
possibilities  and  indeed  attended  with  results  both 
fiscal  and  economic  of  very  great  importance  —  was 
effected  without  public  discussion  and,  it  may  be 
ventured,  without  public  comprehension.  The 
Treasury  announcement  as  to  the  issue  of  August 


>    ■    ■   -  d      J      -I 


38  WAR  BORROWING 

28,  19 1 7,  contained  no  mention  of  payment  by  credit, 
nor  did  the  immediate  succeeding  comment  of  the 
Federal  Reserve  Board  refer  thereto. ^^  The  plan 
simply  appears  to  have  become  generally  operative 
by  the  notification  of  the  several  Federal  Reserve 
Banks  to  member  banks  subscribing  to  the  issue  of 
August  28,  191 7,  in  much  the  manner  employed  by 
the  Federal  Reserve  Bank  of  Richmond  that : 
"  The  qualified  depositaries  will  be  permitted  to 
make  payment  by  credit  for  certificates  allotted,  up 
to  the  amount  for  which  each  has  qualified,  when 
so  notified  by  this  bank."  ^^  In  the  succeeding  issue 
of  September  17,  1917,  this  authorization  was  em- 
bodied in  the  Treasury's  formal  announcement  of 
the  offering: 

"  In  connection  with  the  foregoing  offering  of  the  third 
series  of  certificates  of  indebtedness,  preparatory  to  the 
second  issue  of  the  Liberty  Loan,  the  Secretary  of  the 
Treasury  announces  that  qualified  depositaries  will  be  per- 
mitted to  make  payment  by  credit  for  certificates  allotted 
to  them  for  themselves  and  their  customers  up  to  the 
amount  for  which  each  shall  have  qualified  when  so  noti- 

'^^  Federal  Reserve  Bulletin,  September,  1917,  pp.  651-2,  664. 

^6  Circular  letter  of  August  22,  1917.  In  other  Districts  the 
transition  was  more  gradual.  As  to  the  Federal  Reserve  Bank 
of  New  York  we  are  told  that  "  arrangements  were  made  be- 
ginning with  the  issue  of  April  25  to  redeposit  as  large  a  por- 
tion as  possible  of  the  funds  paid  in.  This,  in  effect,  amounted 
to  a  payment  for  the  certificates  by  credit  on  the  books  of  the 
subscribing  banks,  and  in  later  issues  this  was  the  practice 
actually  pursued."  (Fourth  Annual  Report  of  the  Federal  Re- 
serve Board,  p.  277.)  The  Federal  Reserve  Bank  of  Boston, 
by  authorization  of  the  Treasury  Department,  redeposited  in 
designated  depositary  banks  the  amounts  subscribed  by  such 
banks  to  the  certificate  issues  of  May  10  and  June  8,  1917. 
"  These  redeposits  were  made  on  the  same  day  as  payments 
were  made,  and  therefore  are  similar  to  payments  by  credit." 


THE  PRESENT  39 

fiecl  by  Federal  Reserve  bank,  but  if  qualification  is  not 
completed  by  Sept.  17,  payment  must  be  made  in  ordinary 
way,  in  which  case  the  unexpended  proceeds  of  the  certi- 
ficates will  be  re-deposited  as  promptly  as  qualification  can 
be  completed.  Full  details  of  the  procedure  for  qualifying 
depositaries  and  all  matters  in  such  connection  may  be 
obtained  from  the  Federal  Reserve  banks,  fiscal  agents  of 
the  United  States."  ^'^ 

On  September  24,  19 17,  the  Second  Liberty  Loan 
bill  became  law.  It  provided  that  in  addition  to  the 
other  obhgations  therein  authorized  the  Secretary 
of  the  Treasury  might  borrow  "  for  the  purpose  of 
this  act  and  to  meet  public  expenditures  authorized 
by  law,  such  sum  or  sums  as,  in  his  judgment,  may 
be  necessary  "  by  the  issue  of  certificates  of  indebted- 
ness, at  not  less  than  par  nor  for  more  than  one 
year  term  subject  to  prior  redemption.  There  were 
three  distinctive  provisions  as  to  the  issues  so  au- 
thorized: (a)  no  maximum  limit  was  put  upon  the 
rate  of  interest  to  be  paid,  the  Secretary  of  the 
Treasury  being  empowered  to  borrow  by  the  issue 
of  certificates  "  in  such  form  or  forms  and  subject 
to  such  terms  or  conditions  and  such  rate  or  rates  of 
interest  as  he  may  prescribe  "  ;  (b)  the  total  amount 
of  such  certificates,  which  might  at  any  time  be 
outstanding  including  those  authorized  in  connec- 
tion with  the  First  Liberty  Loan,  was  increased 
from  $2,000,000,000  to  $4,000,000,000;  (c)  the  tax 
exemption  enjoyed  by  the  new  certificates,  as  of  the 
new  bonds,  was  made  inapplicable  not  only  to 
estate  or  inheritance  taxes,  but  to  graduated  addi^ 
tional   income  taxes    ("surtaxes")    and   to   excess 

1^  Commercial  and  Financial  Chronicle,  September  8,  191 7,  p. 
948. 


40  WAR  BORROWING 

profits  and  war  profits  taxes, —  all  of  this  with  the 
qualification  that  any  interest  from  certificate  hold- 
ings not  in  excess  of  $5000  should  be  exempt  from 
the  latter   group   of   taxes. 

The  short-term  borrowing  of  the  Treasury  was 
resumed  under  this  authorization  and  in  conformity 
with  its  terms.  Three  additional  series  of  certifi- 
cates were  issued,  somewhat  less  regular  in  interval 
and  less  uniform  in  nominal  amount  than  the  pre- 
ceding issues.  Of  these  the  first  —  offered  the  day 
after  the  Loan  act  had  become  law  —  was  for 
$400,000,000,  dated  September  26,  and  payable  De- 
cember 15,  on  which  date  the  third  installment  of 
the  bond  subscription  payments  became  due.  The 
other  two  issues  were  emitted  a  month  later  in  quick 
succession  —  October  18  to  mature  November  22, 
and  October  24  to  mature  December  15,  respec- 
tively. Instead  of  being  limited  to  a  specified 
amount,  the  issue  of  October  18  was  offered  "  to  an 
amount  of  not  less  than  $300,000,000  "  and  there 
was  actually  allotted  $385,197,000.  The  issue  of  Oc- 
tober 24  was  offered  without  limitation  of  any  kind, 
and  the  amount  actually  placed  in  the  five  days  in 
which  subscriptions  were  received  reached  the  large 
sum  of  $685,296,000  —  obviating  the  necessity  of 
further  temporary  borrowing  before  the  proceeds 
of  the  Second  Liberty  Loan  became  available. 

It  thus  appears  that  in  the  three  and  one-half 
months  intervening  between  the  approximate  ex- 
haustion of  the  proceeds  of  the  First  Liberty  Loan 
early  in  August  up  to  the  first  availability  of  funds 
from  the  Second  Liberty  Loan  in  mid-November 
the    extraordinary    requirements    of  the   Treasury 


THE  PRESENT  41 

were  met  by  short-term  borrowings  in  the  form  of 
six  successive  certificates  of  indebtedness  to  a  nomi- 
nal aggregate  of  $2,320,493,000.  Of  these  the  first 
three  were  under  the  authority  conferred  by  the 
First  Liberty  Loan  act,  and  the  last  three  under 
that  conferred  by  the  Second  Liberty  Loan  act.  A 
less  evident  but  practically  more  important  dis- 
tinction is  that  after  the  first  issue  (August  9, 
1917),  the  method  of  payment  by  credit  came  into 
increasing  use  by  subscribing  banks  in  settlement 
of  certificates  allotted. 

(D)  Despite  a  huge  available  balance  conse- 
quent upon  the  heavy  over-payment  of  the  first  in- 
stallment on  account  of  the  Second  Liberty  Loan, 
the  Treasury  resumed  short-term  borrowings  in  the 
last  week  of  November,  191 7.  The  expedient  then 
adopted  was  a  further  use  of  certificates  of  in- 
debtedness, this  time  in  anticipation  of  the  proceeds 
of  war  income  and  excess  profits  taxes  payable  in 
June,  1918. 

Authorization  for  this  procedure  had  been  con- 
ferred by  a  provision^^  of  the  war  revenue  act  of 
October  3,  19 17,  empowering  collectors  of  internal 
revenue  to  receive  at  par  and  accrued  interest  cer- 
tificates of  indebtedness  issued  under  the  First  Lib- 
erty Loan  act  in  payment  of  income  and  excess 
profits  taxes  for  "  such  time  and  under  such  regu- 
lations as  the  Commissioner  of  Internal  Revenue, 
with  the  approval  of  the  Secretary  of  the  Treasury, 
shall  prescribe." 

The  reason  formally  assigned  for  this  tax-antici- 

1^  Section  loio. 


42  WAR  BORROWING 

pation  issue  was  "  to  relieve  any  possible  congestion 
or  disturbance  of  the  money  market  such  as  might 
be  caused  by  the  payment  of  taxes  due  between 
June  15  and  June  25,  estimated  to  amount  to  over 
$2,000,000,000."^^  But  such  precautionary  meas- 
ure of  relief  was  not  imperative  seven  months  in 
advance  of  the  assumed  occasion,  the  less  in  that 
important  loan  operations  involving  heavy  requisi- 
tion upon  the  nation's  credit  supply  were  inevitable 
in  the  interval.  It  is  more  likely  that  at  the  time 
definite  provision  was  made  for  the  plan,  neither 
the  volume  nor  the  composition  of  the  over-pay- 
ment of  the  loan  installment  of  November  20,  1917, 
was  fully  anticipated,  and  that  the  Treasury  de- 
sired to  be  in  comfortable  state  for  meeting  the 
$1,385,296,000  certificates  maturing  in  mid-Decem- 
ber. 

On  November  20,  19 17,  the  Treasury  gave  notice 
that  subscriptions,  at  par  and  accrued  interest, 
would  be  received  throug'h  the  Federal  Reserve 
Banks  for  "  a  limited  amount  "  of  four  per  cent. 
Treasury  certificates  of  indebtedness,  dated  Novem- 
ber 30,  1917,  and  maturing  June  25,  1918,  and 
issued  in  denominations  of  $500,  $1000,  $10,000 
and  $100,000.  Certificates  of  indebtedness  then 
outstanding  might  be  tendered  at  par  with  adjust- 
ment of  accrued  interest  in  payment  of  the  new 
issue.  The  new  certificates  were  receivable  at  par 
and  accrued  interest  at  or  before  maturity,  in  pay- 
ment of  income  and  excess  profits  taxes,  when  pay- 
able, but  were  not  available  in  payment  of  Liberty 
bonds  or  on  account  of  bond  subscriptions.  The 
"^^  Federal  Reserve  Bulletin,  December,  1917,  p.  918. 


THE  PRESENT  .  43 

tax  exemption  privileges  of  the  certificates  were  the 
same  as  those  of  other  issues,  with  the  further  ad- 
vantage that  a  ruhng  of  the  Commissioner  of  In- 
ternal Revenue  permitted  certificates  owned  by  cor- 
porations to  be  included  in  "  invested  capital  "  in 
the  calculation  of  the  excess  profits  tax.-'^ 

The  offering  was  extraordinarily  successful.  On 
November  30,  19 17,  when  the  books  were  closed, 
subscriptions  had  reached  some  $691,000,000.  The 
Secretary  of  the  Treasury  spoke  with  satisfaction  of 
the  response,  and  expressed  the  hope  as  to  the  fu- 
ture that  "  the  Federal  Reserve  Banks  and  banks 
and  trust  companies  throughout  the  country  will 
keep  interest  alive  in  issues  of  this  character. 
Their  advantages  are  obvious  to  tax-payers  and 
investors  and  they  are  a  great  aid  to  the  financial 
operations  of  the  Government.  In  this  way  the 
work  which  has  been  done  in  connection  with  the 
first  issues  will  not  be  lost  even  though  the  de- 
mand for  the  certificates  ,at  this  time  has  been 
greater  than  could  be  immediately  gratified."  -^ 

The  sharp  reduction  in  the  Treasury's  resources 
upon  the  payment  of  maturing  certificate  issues  on 
December  15,  19 17,  encouraged  further  recourse  to 
the  same  device,  and  on  December  17,  191 7,  the 
Treasury  announced  a  new  offering  of  certificates 
in  anticipation  of  tax  receipts  of  unspecified 
amount,  to  be  dated  January  2,  19 18,  and  to  mature 
June  25,   1918,  and  in  all  other  respects  identical 

20  Commercial  and  Financial  Chronicle,  December  22,   1917, 
p.  2405;  December  29,  1917,  p.  2497. 

21  Treasury  announcement  of  November  30,   1917,  in  Balti- 
more Sun,  December  i,  1917. 


44  WAR  BORROWING 

with  the  issue  of  November  30,  19 17.  Response 
to  the  offering,  although  slower  than  in  the  case  of 
the  first  issue,  was  hearty.  The  subscription  books 
remained  open  for  some  weeks,  overlapping  the 
certificate  offering  of  January  22  in  anticipation  of 
the  Third  Liberty  Loan,  and  the  total  allotment 
was  $491,822,500.  The  Treasury  offered  further 
series  of  tax  anticipation  certificates  on  February 
15,  March  15,  April  15,  May  15,  all  due  on  June 
25,  1918.  The  arrangement  thus  took  practically 
the  form  of  continuous  "  over  the  counter "  sale 
of  certificates  to  prospective  taxpayers,  with  a  max- 
imum of  one  month's  accrued  interest. 

The  efforts  of  the  Treasury  and  the  activities  of 
the  Federal  Reserve  Banks  were  but  moderately 
successful  in  securing  a  large  absorption  of  the 
tax  anticipation  certificates  after  the  issues  of  No- 
vember 30,  191 7  and  January  2,  1918.  Of  the 
issue  of  May  15,  19 18,  the  considerable  sum  of 
$183,767,000  was  taken;  but  a  substantial  part  of 
this  was  in  immediate  preparation  for  the  payment 
of  the  income  and  excess  profits  taxes  become  due 
on  June  15,  1918.  None  of  the  other  three  issues 
approximated  this  amount.  The  total  volume  of 
tax  anticipation  certificates  issued  was  $1,624,403,- 
500,  as  compared  with  an  actual  yield  of  the  1918 
income  and  excess  profits  taxes  in  the  fiscal  year 
ended  June  30,  19 18,  of  $2,839,083,585. 

(E)  Early  in  January,  19 18,  it  had  become  ap- 
parent that  receipts  from  tax  anticipation  certifi- 
cates of  indebtedness  would  be  insufficient  to  meet 
the  Treasury's  requirements  and  that  early  recourse 


THE  PRESENT  45 

must  be  had  to  some  more  productive  source.  This 
took  the  form  of  certificate  borrowing  in  anticipa- 
tion of  a  Third  Liberty  Loan,  then  definitely  con- 
templated but  not  yet  formally  authorized  nor  even 
specifically  determined.  On  January  17,  19 18,  the 
Treasury  offered  the  first  issue  of  certificates  of 
this  kind,  to  the  amount  of  $400,000,000,  dated 
January  22,  1918,  payable  April  22,  1918  and  bear- 
ing four  per  cent,  interest. 

Three  weeks  later,  the  Treasury  announced  a 
comprehensive  plan  for  short-term  borrowing  in 
anticipation  of  the  Third  Liberty  Loan  —  the  ac- 
tual flotation  of  which  it  was  desired  to  postpone 
"  until  conditions  will  insure  a  wide  distribution  of 
the  bonds  throughout  the  country."  ^^  Instead  of 
issues  of  certificates  of  indebtedness  at  irregular  in- 
tervals and  of  unequal  amounts,  it  was  proposed 
to  offer  at  fortnightly  intervals  beginning  February 
8,  1918,  six  series  of  $500,000,000  each  of  not 
more  than  ninety  days  maturity.  As  theretofore, 
the  certificates  were  to  be  distributed  by  the  Fed- 
eral Reserve  Banks  and  to  be  absorbed  by  the  banks 
of  the  country  —  national,  state  and  trust  com- 
panies ;  non-member  as  well  as  member  —  as  short- 
term  investments  in  their  own  behalf  and  for  their 
customers.  Moreover  instead  of  relying  on  vol- 
untary optional  response,  the  Treasury  urged  uni- 
form proportionate  contribution  from  every  nat- 
ional bank,  state  bank  and  trust  company,  in  the 
form  of  one  per  cent,  of  its  gross  resources  to  be 
set  aside  weekly  for  investment  in  the  certificates. 

22  Text    of    announcement    in    Federal    Reserve    Bulletin, 
March,  1918,  p.  161. 


46  WAR  BORROWING 

The  total  resources  of  the  25,180  national  banks, 
state  banks  and  trust  companies  reporting  to  the 
Comptroller  of  the  Currency  aggregated  on  June 
20,  1917,  $30,850,527,556.  So  that  the  allocation 
of  one  per  cent,  weekly  for  the  purchase  of  cer- 
tificates of  indebtedness  would  realize,  conserva- 
tively, the  Treasury's  program.^^ 

On  February  6,  1918,  the  Treasury  offered 
through  the  Federal  Reserve  Banks  the  first  of  such 
issues  —  $500,000,000  certificates  of  indebtedness 
to  mature  on  May  9,  19 18,  and  bearing  four  per 
cent,  interest  from  February  8,  19 18.  In  con- 
nection with  this  offer  the  Secretary  of  the  Treas- 
ury addressed  a  telegram  to  all  banks  and  trust  com- 
panies, inviting  each  as  a  matter  of  patriotic  duty, 
to  set  aside  each  week  approximately  one  per  cent, 
of  its  gross  receipts  and  place  that  amount  at  the 
disposal  of  the  government  by  investing  it  in  cer- 
tificates of  indebtedness  as  might  from  time  to  time 
be  offered.  With  fortnightly  issues,  it  would  fol- 
low "  if  each  bank  will  do  its  share  that  as  a  maxi- 
mum 10  per  cent,  of  the  gross  resources  of  the 
banks,  or  approximately  $3,000,000,000,  will  be 
raised  between  now  and  the  next  Liberty  Loan, 
provided  that  it  is  necessary  to  call  upon  the  banks 
to  that  extent."  ^^ 

The  appeal  for  such  "  a  co-operative  effort  of  the 
banks  "  was  effective  to  the  extent  that  the  number 
of  subscribers  to  the  issue  of  February  8  was  double 
the  number  to  the  preceding  issue  of  January  22. 
But  in  amount,  the  subscriptions  from  the  country 

^^  "  Report  of  Comptroller  of  Currency,"  1917,  p.  108. 
2'*  Federal  Reserve  Bulletin,  March,  1918,  p.  161. 


THE  PRESENT  47 

at  large  was  characterized  by  the  Treasury  as  "  dis- 
tinctly disappointing."  Only  two  districts,  New 
York  and  Kansas  City,  exceeded  their  allotment, 
and  but  one  other,  Minneapolis,  equaled  its  quota. 
The  entire  issue  of  $500,000,000  was  eventually 
subscribed,  but  this  result  was  only  made  possible 
by  the  twelfth  hour  action  of  the  larger  banks  in 
financial  centers,  notably  New  York,  in  taking  more 
than  their  respective  quotas.^' 

In  preparation  for  the  succeeding  issue  of  Feb- 
ruary 22,  the  Treasury  redoubled  its  efforts.  The 
distribution  of  quotas  of  the  several  Federal  Re- 
serve Districts  was  modified ;  possible  misapprehen- 
sion as  to  the  extent  of  each  bank's  expected  par- 
ticipation was  clarified ;  the  minimum  denomination 
of  the  certificates  was  reduced  from  $1,000  to  $500 
and  the  interest  rate  of  the  certificates  was  increased 
to  four  and  one  half  per  cent.  —  with  the  assurance 
that  there  would  be  no  further  increase  in  connec- 
tion with  certificate  issues  in  anticipation  of  the 
Third  Liberty  Loan.  A  telegram  was  sent  by  the 
Treasury  to  every  bank  and  trust  company  which 
had  not  responded  to  the  offering  of  February  8, 
and  this  solicitation  was  followed  up  through  the 
organization  of  the  Federal  Reserve  Banks,  with 
the  intention  that  "  the  number  of  subscribers  for 
this  coming  issue  shall  be  again  doubled,  and  ap- 
proximately every  bank  and  trust  company  in  the 
United  States  shall  be  upon  the  roll."  The  Treas- 
ury announcement  of  the  offering  of  the  issue 
concluded  with  the  appeal :  "  This  is  a  patriotic 
duty  which  is  set  for  the  banks  and  trust  companies 

25  Federal  Reserve  Bulletin,  March,  1918,  pp.  153-4,  162. 


48  WAR  BORROWING 

of  the  Nation.     I  hope  that  they  will  meet  the  re- 
quirements of  the  situation."  ^® 

Thanks  to  these  efforts  the  number  of  subscribers 
to  the  issue  was  materially  increased  and  the  full 
amount  of  the  offering  was  taken.  The  number  of 
subscriptions  by  Federal  Reserve  Districts  for  the 
issue,  as  compared  with  the  preceding  issues  of 
January  22,  and  February  8,  was  as  follows :  "^"^ 

Jan.  22  Feb.  8  Feb.  27 

Boston    212  471  554 

New  York  275  766  1,193 

Philadelphia    415  800  730 

Cleveland     770  i  ,200  1,396 

Richmond    158  479  558 

Atlanta     216  755  717 

Chicago    910  2,424  2,832 

St.    Louis    1,654  1,034  1.401 

Minneapolis    375  i,i93  1436 

Kansas  City   515  1,547  1,653 

Dallas   480  951  955 

San  Francisco   384  93°  1,048 

Total    6,364  12,550  14,472 

Three  further  issues  of  certificates  were  offered 
in  accordance  with  the  Treasury's  program  and 
substantially  oversubscribed :  on  March  20,  matur- 
ing June  18  to  the  amount  of  $543,032,500;  on 
April  10,  maturing  July  9  to  the  amount  of  $551,- 
226,500;  and  on  April  22,  maturing  July  18  to  the 
amount  of  $517,826,500.  The  final  issue  of  April 
22,  1918.  was  in  part  a  refunding  operation  of  the 
issue  of  January  22,  1918,  due  on  that  date,  cer- 
tificates of  the  January  issues  being  taken  in  pay- 

28  Federal  Rcscri'e  Bulletin,  March,  1918,  p.  162. 
-''Federal  Reserve  Bulletin,  April,  1918,  p.  251. 


THE  PRESENT  49 

ment  of  the  April  issue,  with  adjustment  of  accrued 
interest. 

The  results  of  the  Treasury's  efforts  to  secure 
more  general  absorption  of  the  certificates  had  been 
summed  up  after  the  offering  of  the  issue  of  March 
20  as  follows: 

"  An  especially  interesting  aspect  of  the  operation  has 
been  the  success  attained  in  securing  a  wider  distribution 
of  the  certificates  among  the  banks  of  the  interior,  which 
during  the  period  preceding  the  Second  Liberty  Loan  had 
hardly  sustained  their  full  share  of  the  burden,  leaving  the 
bulk  of  the  load  to  be  carried  by  institutions  on  the  eastern 
seaboard.  The  banks  and  trust  companies  throughout  the 
country  are  now  definitely  enlisted  in  the  task  of  carrying 
through  the  financial  operations  of  the  Government,  and 
a  correspondingly  greater  degree  of  strength  is  thereby 
imparted  to  the  financial  machinery."  -'' 

This  estimate  was  reasonably  justified  by  the 
results  of  the  remaining  issues;  even  though  the 
number  of  participating  banks  may  not  have  shown 
the  same  progressive  increase.  The  number  of  sub- 
scriptions for  the  last  three  issues  of  the  series  have 
not  been  made  public,  but  it  is  unlikely  that  it  was 
much  in  excess  of  that  for  the  issue  of  February 
27.     The  relative  distribution  of  the  six  issues  of 

2»  Federal  Reserve  Bulletin,  April,  1918,  p.  251.  To  en- 
courage proportionate  subscriptions  from  all  banks,  certain  of 
the  Federal  Reserve  Banks  published  in  brochure  form,  after 
each  certificate  issue  of  the  Third  and  Fourth  Liberty  Loans, 
"  Lists  of  Subscribers,"  with  the  respective  quotas  and  amounts 
subscribed,  for  the  confidential  use  of  the  banks.  Of  the 
"  Lists  "  which  the  writer  has  been  permitted  to  examine  — 
New  York,  Boston,  Cleveland  and  San  Francisco  —  that  of 
Cleveland,  with  its  accompanying  "  quota  book  "  is  especially 
notable  for  the  fullness  and  value  —  practical  and  scientific  — 
of  its  statistical  material. 


50  WAR  BORROWING 

certificates  in  anticipation  of  the  Third  Liberty  Loan 
among  the  financial  institutions  of  the  Federal  Re- 
serve Districts  is  shown  in  the  following  table :  ^^ 

Jan.  22  Feb.  8  Feb.  2-j  Mar.  20  Apr.  10  Apr.  22 
[per  centum] 

Treasury    0.6  0.7  0.7  .  .  .3 

Boston    5.0  5.8  7.1  9.8  7.2  7.0 

New   York    52.4  48.3  34.6  35.6  39.1  43.0 

Philadelphia    5.6  6.0  6.6  6.9  6.8  6.7 

Cleveland    6.5  6.8  8.9  8.9  8.3  7-5 

Richmond    1.8  2.4  3.6  3.0  2.0  2.1 

Atlanta     2.4  2.5  3.0  2.9  3.1  2.1 

Chicago    7.6  8.5  11.8  11.8  11.9  12.2 

St.    Louis    4.5  4.0  5.1  4.2  3.8  4.9 

Minneapolis     ....   2.7  3.0  3.4  2.9  2.8  2.9 

Kansas  City   3.0  4.3  4.8  4.8  4-5  3-9 

Dallas     3.3  2.8  3.8  2.7  3-0  2.5 

San   Francisco...  5.3  5.0  6.7  5.7  7-i  4-5 

In  all  important  particulars,  other  than  amount, 
interest  rate  and  maturity,  the  certificate  issues  in 
anticipation  of  the  Third  Liberty  Loan  corre- 
sponded with  the  issues  in  anticipation  of  the  Sec- 
ond Liberty  Loan.  The  issue  of  April  22,  1918, 
was  like  the  preceding  issues  specifically  redeemable 
after  ten  days  public  notice  at  par  and  accrued  in- 
terest. But  to  stimulate  the  use  of  the  issue  in  pay- 
ment of  loan  subscriptions,  the  certificates  whether 
or  not  called  for  redemption  were  made  acceptable 
at  par  with  an  adjustment  of  accrued  interest  to 
May  9,  191 8,  if  tendered  on  May  4,  19 18,  in  pay- 
ment on  the  subscription  price  then  payable  of  bonds 
of  the  Third  Liberty  Loan  subscribed  for  by  and 
allotted  to  holders  of  such  certificates.     If  not  called 

2''  Computed  from  tabic  showing  actual  allotments  in  Fed- 
eral Reserve  Bulletin,  May,  1918,  p.  359. 


THE  PRESENT  51 

for  redemption  and  not  so  used  the  certificates  might 
be  tendered  on  July  18,  19 18,  when  due,  in  payment 
on  the  subscription  price  of  bonds,  in  accordance 
with  the  terms  of  the  offering. 

The  certificate  borrowings  in  anticipation  of  the 
Third  Liberty  Loan  were  made  under  authority  con- 
ferred by  the  First  and  Second  Liberty  Loan  acts. 
On  April  4,  191 8,  the  Third  Liberty  Loan  bill  was 
approved.  The  maximum  amount  of  certificates 
that  might  at  any  time  be  outstanding  was  therein 
increased  from  $4,000,000,000  to  $8,000,000,000, 
and  provision  was  made  that  certificates  of  indebted- 
ness might  be  issued  payable,  principal  and  interest, 
in  foreign  money,  and  that  depositaries  in  foreign 
countries  might  be  designated  for  the  receipt  of 
all  or  any  part  of  the  proceeds. 

In  the  accompanying  administrative  announce- 
ment of  the  Treasury  the  installment  dates  for  pay- 
ment upon  bond  subscriptions  were  fixed  on  May 
4-9  (5  per  cent.).  May  28  (20  per  cent.),  July 
18  (35  per  cent.)  and  August  15  (40  per  cent). 
Payment  in  full  might  be  made  or  completed  at  any 
installment  date,  and  payment  of  any  installment 
or  payment  in  full  might  be  made  in  certificates  of 
indebtedness  except  those  of  the  issues  maturing 
April  22,  and  June  2^.^^  As  to  the  use  of  cer- 
tificates in  payment,  an  important  change  in  ac- 
customed procedure  appeared  in  the  provision  that 
"  Qualified  depositary  banks  and  trust  companies 
may  make  payment  by  credit  upon  the  subscriptions 
of  themselves  and  their  customers  but  only  to  the 

^0  The  certificates  maturing  June  25  were  of  the  six  series 
issued  in  anticipation  of  1918  income  and  excess  profits  taxes. 


52  WAR  BORROWING 

extent  that  they  cannot  make  payment  in  Treasury 
certificates  of  indebtedness."  ^^ 

No  information  is  available  as  to  the  extent  to 
which  this  restriction  may  have  compelled  the  tender 
of  certificates  in  payment  of  the  first  loan  install- 
ment more  than  would  otherwise  have  occurred ;  but 
on  the  whole  it  does  not  seem  likely  that  any  con- 
siderable influence  was  so  exerted.  Up  to  May  28, 
1918,  only  $823,332,600  certificates  were  used  in 
such  payment  —  less  than  the  nominal  aggregates 
of  the  certificate  issues  maturing  May  9  and  28. 
The  remaining  three  certificate  issues  aggregating 
$1,612,085,500  matured  in  June  i8-July  18,  and 
were  in  part  tendered  in  later  Loan  installment  pay- 
ments, in  part  redeemed  from  out  the  general  fund 
of  the  Treasury  replenished  by  (a)  the  Loan  in- 
stallments, (b)  the  receipts  from  the  19 18  income 
and  excess  profits  taxes  and  (c)  the  proceeds  of 
the  early  certificate  issues  in  anticipation  of  the 
Fourth  Liberty  Loan. 

(F)  The  almost  immediate  resumption  of  an- 
ticipatory borrowing  after  the  Third  Liberty  Loan 
flotation  may  be  regarded  as  dictated  by  the  Treas- 
ury's policy  of  a  heavy  working  balance.  The  pre- 
liminary announcement  was  accompanied  by  no 
uncertainty  as  to  the  instrumentality  to  be  em- 
ployed :  ^^ 

"  Experience  is  again  showing  the  desirability  of  this 
method  of  anticipating  the  proceeds  of  loans,  and  suggests 

31  See  text  in  Commercial  and  Financial  Chronicle,  April  6, 
1918,  p.  1402. 

32  Federal  Reserve  Bulletin,  June,  rgiS,  p.  485. 


THE  PRESENT  53 

that  when  carefully  employed  it  has  the  effect  of  produc- 
ing a  steady  flow  of  available  free  funds  into  the  hands 
of  the  Government,  there  to  be  as  steadily  used  and  dis- 
bursed for  current  expenses  on  account  of  salaries  and 
commodities." 

The  actual  procedure  was  a  further  development 
of  the  systematic  use  of  the  credit  making  power 
of  the  banks  in  connection  with  certificate  issues  in 
anticipation  of  the  Fourth  Liberty  Loan.  On  June 
12,  19 18,  the  Secretary  of  the  Treasury  addressed  a 
new  letter  to  every  bank  and  trust  company  in  the 
United  States  setting  forth  that  the  expenditures 
of  the  Government,  as  nearly  as  could  then  be  esti- 
mated, would  require  the  sale  of  certificates  of  in- 
debtedness up  to  November  i,  19 18,  to  an  aggre- 
gate amount  approximately  of  $6,000,000,000. 
This  would  involve  the  issue  every  two  weeks  of 
$750,000,000  of  certificates  substantially  similar  in 
character  to  those  issued  prior  to  the  Third  Liberty 
Loan  except  that  they  were  to  be  of  various  ma- 
turities not  exceeding  four  months.  The  first  of 
such  issues  was  to  be  dated  June  25  maturing  Oc- 
tober 24  with  interest  at  four  and  a  half  per  cent., 
and  similar  issues  were  expected  to  be  made  on 
Tuesday  of  every  other  week  thereafter. 

The  change  from  optional  participation  on  the 
part  of  individual  banks  to  a  manner  of  moral 
pressure,  noticed  in  connection  with  the  issues  an- 
ticipatory of  the  Third  Liberty  Loan,  now  took  the 
form  almost  of  administrative  compulsion.  The 
Federal  Reserve  Banks  were  to  advise  all  banks  and 
trust  companies  in  their  respective  districts  of  the 
amount  of  certificates  which  they  were  to  take  of 


54  WAR  BORROWING 

each  issue  in  pursuance  of  this  program,  this  amount 
being  estimated  as  "  roughly  to  equal  two  and  one- 
half  per  cent,  of  the  gross  resources  of  each  bank 
and  trust  company  for  every  period  of  two  weeks 
or  a  total  of  five  per  cent,  monthly" —  as  compared 
with  a  total  of  four  per  cent,  monthly  for  the  Third 
Liberty  Loan  issues. 

Announcement  ^^  was  also  made  of  the  contem- 
plated issue  "  at  a  convenient  and  favorable  period 
during  the  summer  "of  certificates  in  anticipation 
of  the  June,  19 19,  income  and  excess  profits  taxes 
"  of  an  amount  yet  to  be  determined  perhaps  $2,- 
000,000,000  "  of  suitable  maturities  for  tax  pay- 
ments. To  the  extent  that  such  tax  anticipation 
certificates  were  sold,  an  equivalent  reduction  in  the 
amounts  of  the  fortnightly  loan  anticipation  issues 
or  of  the  total  number  of  such  offerings  might  be 
expected.  All  banks  were  enjoined  to  "  make  ar- 
rangements promptly  of  such  a  character  that  no  de- 
lay will  be  experienced  in  the  sale  and  distribution 
of  Treasury  Certificates  of  both  issues,"  to  the  end 
that  "  no  patriotic  banker  in  the  United  States  will 
fail  to  do  his  full  meed  of  essential  service  to  his 
country  and  to  her  noble  defenders."  ^'^ 

The  program  was  carried  out  without  important 

33  Text  in  Commercial  and  Financial  Chronicle,  June  22, 
1918,  p.  2607. 

3^  For  the  promptness  and  vigor  with  which  this  appeal  was 
spread  see,  for  example,  the  letter  sent  under  date  of  Augiist 
26,  1918,  to  the  banks  in  the  State  of  Utah  by  the  banking 
commissioner  of  that  State  transmitting  resolutions  passed  by 
the  Salt  Lake  Clearing  House  Association,  wherein  each 
member  institution  formally  agreed  to  purchase  the  full  al- 
lotment of  certificates  as  and  when  offered  {Federal  Reserve 
Bulletin,  October,  1918,  pp.  936-7). 


THE  PRESENT  55 

change,  other  than  that  in  consequence  of  the  earlier 
flotation  of  the  Fourth  Liberty  Loan  certificate  bor-- 
rowing  came  to  an  end  a  month  sooner  than  had 
been  contemplated.  Between  June  25  and  October 
I,  there  were  issued  seven  series  of  four  and  a  half 
per  cent,  certificates,  each  of  four  months  maturity 
but  identical  in  all  other  respects  with  the  earlier 
issues.  In  two  particulars  there  was  minor  but  in- 
teresting variation  from  the  Treasury's  original  plan. 
There  was  no  issue  on  the  fortnightly  date  August 
20,  the  first  of  the  new  series  of  tax  anticipation 
issues  being  then  offered  in  seeming  lieu  thereof. 
Moreover,  only  the  first  two  issues  were  offered  in 
the  amount  originally  contemplated,  $750,000,000. 
The  third,  fourth  and  seventh  issues  were  of  $500,- 
000,000  each  and  the  fifth  and  sixth,  $600,000,000 
each.  In  each  instance  there  was  acceptance  of 
oversubscription  as  to  these  less  amounts,  ranging 
from  $89,646,500  in  the  first  issue,  to  $141,069,000 
in  the  last,  resulting  in  an  actual  allotment  for  the 
seven  issues  of  $4,659,820,000  as  compared  with  a 
contemplated  aggregate  for  such  issues  of  $5,250,- 
000,000. 

A  possible  reduction  in  the  number  and  volume 
of  the  loan  anticipation  issues  had  been  foreshad- 
owed in  the  Treasury's  first  announcement  in  the 
event  of  heavy  response  to  the  tax  anticipation  of- 
fering. But  the  tax  anticipation  certificates  were 
not  issued  until  August  20,  and  eventually  only 
some  $150,000,000  were  taken.  In  announcing  the 
reduced  minimum  amount  of  the  third  bi-weekly 
oflFering  on  July  20,  19 18,  the  Treasury  explained 
that  this  was  in  consequence  of  the  over-subscrip- 


56  WAR  BORROWING 

tion  of  the  first  two  issues  and  the  increased  re- 
turns from  war  savings  certificates  and  from  in- 
come and  excess  profits  taxes,  but  added :  ^^  "  This, 
however,  is  only  a  minimum  amount  and  those  in- 
stitutions which  have  made  arrangements  to  sub- 
scribe their  share  on  the  basis  of  an  offering  of 
$750,000,000  will  be  free  to  do  so."  In  addition  to 
the  specific  reasons  set  forth  it  is  probable  that  the 
reduction  was  in  a  measure  due  to  the  modified 
policy  of  the  Treasury  with  respect  to  its  working 
balance,  noticeable  after  mid- August. 

(G)  On  August  16,  1918,  the  Secretary  of  the 
Treasury,  in  accordance  with  the  announced  pro- 
gram, offered  for  subscription  at  par  and  accrued 
interest,  the  "  tax  series  of  1919  "  certificates  of  in- 
debtedness. The  issue  was  dated  August  20,  19 18, 
bore  interest  at  the  rate  of  four  per  cent,  and  ma- 
tured July  15,  1919.  To  avoid  the  necessity  of  suc- 
cessive issues  or  the  inconvenient  accumulation  of 
accrued  interest,  provision  was  made  for  the  bi- 
monthly payment  of  interest.  In  all  other  technical 
particulars  the  issue  corresponded  with  the  19 18 
tax  anticipation  series.  The  offering  was  made 
without  limit  of  amount ;  but  the  Treasury  reserved 
as  usual  the  right  to  reject  any  subscription  and 
to  allot  less  than  the  amount  of  certificates  applied 
for  and  to  close  the  subscription  at  any  time  with- 
out notice.  As  fiscal  agents  of  the  United  States, 
Federal  Reserve  Banks  were  to  receive  subscriptions 
and  to  make  allotment  in  full  in  the  order  of  the  re- 
ceipt of  applications  until  further  notice.  As  be- 
^^  Federal  Reserve  Bulletin,  August,  1918,  p.  699. 


THE  PRESENT  57 

fore,  qualified  depositaries  were  permitted  to  make 
payment  by  credit  for  certificates  allotted  to  them 
for  themselves  and  their  customers  up  to  an  amount 
for  which  each  should  have  qualified  in  excess  of 
existing  deposits.  Certificates  of  the  four  series 
issued  in  anticipation  of  the  Fourth  Liberty  Loan 
then  outstanding  were  in  manner  similar  to  the 
1 91 8  procedure  made  acceptable  at  par  with  an 
adjustment  of  accrued  interest  in  payment  for  any 
certificates  of  the  tax  series  then  offered  which 
should  be  subscribed  for  and  allotted  not  later  than 
August  30,  19 1 8.  To  the  extent  that  this  privilege 
was  availed  of  the  new  tax  series  obviously  again 
served  as  a  refunding  issue  of  the  earlier  maturing 
loan  anticipation  series. 

The  offering  was  pressed  with  characteristic 
vigor.  Under  date  of  August  16,  1918,  a  circular 
letter  was  addressed  by  the  Secretary  of  the  Treas- 
ury apparently  to  every  income  and  excess  profits 
tax-payer  in  the  country,  urging  purchase  of  the 
certificates  both  on  the  score  of  personal  advantage 
and  patriotic  service,  and  concluding  with  the  vig- 
orous appeal : 

"  The  taxpayer  who  buys  these  certificates  contributes 
in  many  ways  to  help  in  our  great  problem  of  winning 
the  war.  First,  he  pays  the  Government  money  before 
it  is  due,  receiving  interest  from  the  Government  mean- 
while;  second,  he  practices  economy  and  thrift  and  thereby 
releases  goods  and  services  to  the  Government  which  are 
greatly  needed  for  winning  the  war ;  third,  he  saves  him- 
self trouble  and  money  and  relieves  the  banking  institu- 
tions, to  which  he  would  otherwise  have  to  turn,  from  the 
pressure  which  his  failure  to  prepare  in  advance  for  the 
payment  of  his  taxes  would  involve. 


58  WAR  BORROWING 

"  The  man  who  buys  Treasury  certificates  to  the  amount 
of  the  taxes  he  will  have  to  pay,  and  thereby  anticipates 
their  payment,  will  do  a  wise  and  helpful  thing  not  only 
for  himself  but  for  his  country,  and  will  contribute  in  a 
most  definite  and  patriotic  way  to  the  triumph  of  America 
in  her  mortal  combat  with  the  enemies  of  liberty  and 
democracy  —  the  Kaiser's  legions  of  lust  and  license  — 
and  share  in  the  new  glory  of  America's  vindicated  ideals 
of  justice  and  humanity." 

The  result  was  gravely  disappointing.  Between 
August  20  and  November  6  the  total  amount  of 
such  certificates  sold  was  only  $157,552,500. 
Whatever  other  reasons  may  have  operated,  the 
low  interest  rate  of  the  series  doubtless  played  a 
considerable  part  in  checking  sales.  With  the 
money  market  "  pegged  "  at  six  per  cent,  and  the 
four  and  a  half  per  cent,  loan  anticipation  cer- 
tificates in  direct  competition  there  was  little  war- 
rant for  expecting  a  large  absorption  of  the  four 
per  cent,  tax  series.^^ 

There  have  thus  been  emitted,  in  conjunction 
with  our  war  borrowing,  thirty-one  issues  of  cer- 
tificates of  indebtedness  to  an  aggregate  amount  of 
$12,692,559,500.  Of  these  the  initial  issue  was 
nominally  in  anticipation  of  the  proceeds  of  the 
19 1 7  income  tax;  six  subsequent  issues  were  in 
anticipation  of  the  proceeds  of  the  1918  income  and 
excess  profits  taxes,  and  one  in  similar  anticipation 
of  19 1 9  taxes  —  the  latter  two  groups  however  par- 
taking of  important  characteristics  of  the  loan  an- 

36  On  November  6,  1918,  the  Treasury  discontinued  the  sale 
of  the  four  per  cent,  tax  anticipation  certificates  and  offered  in 
lieu  thereof  a  four  and  a  half  per  cent,  series  bearing  date  of 
November  7,  1918,  and  maturing  March  15,  1919. 


THE  PRESENT  59 

ticipation  issues.  The  remaining  twenty-three  is- 
sues of  an  aggregate  amount  of  $10,860,603,500 
were  emitted  in  anticipation  successively  of  the  pro- 
ceeds of  the  First,  Second,  Third  and  Fourth  Lib- 
erty Loans. 

Such  anticipatory  borrowings  have  formed  a 
large  proportion  of  the  nominal  amounts  of  the 
Liberty  Loans.  The  volume  of  certificates  out- 
standing at  the  several  dates  upon  which  the  first 
installment  on  account  of  bond  subscriptions  became 
payable,  and  the  ratio  of  such  volume  to  the  amount 
of  the  corresponding  loan  have  been  approximately 
as  follows: 

Ratio  of 
Liberty      Dateofist  Amount         Certificates    Certificates 

Loan        Installment  of  Loan  Issued  to  Loan 

First  June    28,    '17  $2,000,000,000  $   868,205,000        43.4 

Second  Nov.    15,    '17    3,808,766,150    2,320,493,000        60.9 

Third  May      4,    '18    4,170,019,650    2,612,085,500        62.6 

Fourth  Oct.    19,    '18    6,989,047,000    4,665,320,000        66.7 

In  other  words,  the  Liberty  Loans  have  been  to 
an  increasing  extent  required  to  discharge  short- 
term  indebtedness  contracted  by  certificate  borrow- 
ing in  anticipation  of  the  flotations. 

The  certificates  have  been  taken  and  held  in  the 
main  by  the  financial  institutions  of  the  country  — 
national  banks,  state  banks  and  trust  companies. ^'^ 
The  Federal  Reserve  Banks,  with  whom  was  placed 

37  An  investigation  made  by  the  Savings  Bank  Section  of  the 
American  Bankers'  Association  showed  that  out  of  405  such 
institutions  in  the  six  New  England  States  167  savings  banks 
having  60  per  cent,  of  the  total  assets  of  such  banks  had  in- 
vested 3.2  per  cent,  of  their  resources  in  certificates  of  indebt- 
edness. In  the  five  Eastern  States,  out  of  196  such  institutions 
loi  savings  banks  having  more  than  60  per  cent,  of  the  total 


6o  WAR  BORROWING 

the  entire  ante-bellum  issue  of  March  31,  19 17,  sub- 
sequently withdrew  from  the  role  of  direct  investors 
and  confined  themselves  to  the  functions  of  distribu- 
tion and  remittance,  with  only  such  temporary  in- 
vestment service  as  was  made  necessary  by  admin- 
istrative convenience,  by  the  insufficiency  of  the 
banks'  subscriptions,  and  by  the  desirability  of  aid- 
ing wider  distribution  of  certificates  among  the 
banks.  The  provision  in  the  war  revenue  act  of 
October  3,  1917,  effective  December  i,  1917,  im- 
posing a  tax  of  two  cents  per  $100  or  any  frac- 
tional part  thereof  on  promissory  notes  was  subse- 
quently held  to  include  collateral  notes  tendered  for 
discount  to  Federal  Reserve  Banks.  This  penalty 
upon  banking  operations  in  conjunction  with  cer- 
tificate borrowing  and  loan  flotations  was  avoided 
by  the  use  of  "  resale "  or  "  repurchase  agree- 
ments," whereby  the  Federal  Reserve  Banks  ac- 
quired and  held  temporarily  Liberty  bonds  and  cer- 
tificates of  indebtedness  until  taken  over  by  sub- 
scribing banks.  By  the  enactment  of  the  War 
Finance  Corporation  bill  on  April  5,  1918,  prom- 
issory bills  secured  by  United  States  war  obligations 
were  no  longer  subject  to  stamp  taxes,  and  Fed- 
eral Reserve  Banks  instead  of  temporarily  acquir- 
ing such  securities  under  "  repurchase  agreements  " 
reverted  to  the  practice  in  vogue  before  December 
I,  19 1 7,  of  accepting  from  the  member  banks 
United  States  war  obligations  as  collateral  for 
promissory  notes. ^^ 

assets  had  invested  4.7  per  cent,  of  their  resources  in  the 
same    manner    {Federal   Reserve    Bulletin,   October,    1918,    p. 

953). 

38  Federal  Reserve  Bulletin,  May,  1918,  p.  360. 


THE  PRESENT  6i 

Of  the  certificates  acquired  by  the  banks,  much 
the  largest  quota  has  been  for  their  own  account, 
only  a  minor  part  being  apparently  taken  in  behalf 
of  customers.  This  applies  to  the  loan  anticipation 
certificates ;  with  respect  to  the  tax  anticipation  is- 
sues the  conditions  have  probably  been  the  reverse. 
No  precise  tabulations  are  available  as  to  the  sev- 
eral amounts  of  the  loan  anticipation  certificates 
taken  and  held  by  the  banks  as  compared  with  those 
taken  and  held  by  investors.  It  is  possible,  how- 
ever, to  form  some  opinion  as  to  this  from  the 
condition  of  the  national  banks  on  the  several 
"call"  dates;  from  the  condition  of  ''member 
banks  in  leading  cities  "  reporting  weekly  after  De- 
cember 7,  1917,  to  the  Federal  Reserve  Board;  and 
from  the  condition  of  member  banks  other  than 
national  banks  on  December  31,  1917,  similarly  re- 
ported. A  somewhat  involved  and  necessarily  free 
computation  from  such  data  —  attempted  by  the 
present  writer  and  elsewhere  set  forth  in  detail  ^^  — 
leads  to  the  highly  tentative  conclusion  that  of  the 
certificate  issues  prior  to  January  i,  19 18,  the  banks 
took  for  their  own  account  slightly  less  than  seven- 
eighths  and  that  of  the  issues  emitted  thereafter 
up  to  April  19,  1918  when  large  amounts  of  tax  an- 
ticipation certificates  had  been  sold  "  over  the 
counter  "  and  when  progress  had  been  made  in  se- 
curing a  wider  distribution  and  absorption  of  the 
loan  anticipation  issues  —  the  banks  took  something 
more  than  three-fifths.^*^ 

39  "  Holdings  by  the  Banks  of  Treasury  Certificates  "  in  Fed- 
eral Reserve  Bulletin,  September,  1918,  pp.  845-7. 
^'^  Some  modification  of  these  proportions  is  suggested  by 


62  WAR  BORROWING 

In  the  absorption  of  the  certificates  for  themselves 
and  their  customers,  the  banks  of  the  New  York 
District  have  taken  the  leading  part  and  this  tend- 
ency has  continued  with  the  progress  of  the  Treas- 
ury's short-term  borrowing.  Of  the  $868,205,000 
certificates  issued  in  anticipation  of  the  First  Lib- 
erty Loan,  the  banks  of  the  New  York  District 
took  $459,962,000  or  53  per  cent. ;  and  of  the  $2,- 
320,493,000,  issued  in  anticipation  of  the  Second 
Liberty  Loan,  $1,467,543,000  or  63  per  cent,  was 
so  taken.  Of  the  final  issue  of  this  series  —  (n) 
$685,296,000  bearing  date  of  October  24,  1917  — 
the  New  York  banks  took  no  less  than  $543,683,000 
or  79  per  cent.,  and  even  of  the  next  succeeding 
issue  —  the  first  of  the  series  of  19 18  tax  antici- 
pation issues —  (12)  $691,872,000  bearing  date  of 
November  30,  191 7  —  $494,070,500  or  ^2  per  cent, 
was  so  taken.  With  the  systematic  efforts  of  the 
Treasury  to  establish  a  wider  subscription  basis  for 

the  results  of  valuable  inquiries,  along  the  lines  laid  down 
above,  made  by  Mr.  Frederick  H.  Curtiss,  Chairman  of  the 
Federal  Reserve  Bank  of  Boston,  as  to  the  absorption  of  cer- 
tificates of  indebtedness  in  the  New  England  District.  It  ap- 
pears that  the  assumption  made  in  the  foregoing  computation 
that  certificates  have  been  taken  by  the  trust  companies  in  the 
same  proportion  as  by  the  national  banks  does  not  hold,  at 
least  in  this  District,  with  respect  to  more  recent  certificate 
issues.  To  the  certificates  issued  in  anticipation  of  the  Third 
Liberty  Loan  the  national  banks  in  the  District  subscribed 
11.94  per  cent,  of  their  total  resources,  while  trust  companies 
took  only  7.13  per  cent.  To  the  certificates  in  anticipation  of 
the  Fourth  Liberty  Loan  the  national  banks  subscribed  15.33 
per  cent,  of  their  resources  and  the  trust  companies  only  11.97 
per  cent.  It  appears  further  that  of  the  certificates  sold  to 
l)anks  and  trust  companies  in  the  District  between  June  25, 
and  August  31,  1918,  there  were  retained  by  such  institutions 
up  to  the  latter  date,  approximately  41.9  per  cent,  of  the 
amount  taken. 


THE  PRESENT  63 

the  certificate  issues  in  anticipation  of  the  Third 
and  Fourth  Liberty  Loans,  the  relative  amounts  al- 
lotted to  the  New  York  District  became  less.  Of 
the  $3,012,085,500  certificates  issued  in  anticipa- 
tion of  the  Third  Loan  only  $1,255,308,000  or  42 
per  cent.,  and  of  the  $4,659,820,000  in  anticipation 
of  the  Fourth  only  $1,680,989,000  or  36  per  cent, 
were  taken  by  New  York. 

The  essential  role  in  the  New  York  District  was 
of  course  played  by  the  New  York  City  banks. 
With  respect  to  the  issues  in  anticipation  of  the 
Second  Liberty  Loan  "Of  the  1076  banks  (not  in- 
cluding savings  banks)  outside  of  New  York  City, 
308  purchased  certificates  of  indebtedness,  but  of 
these  only  about  one-half  were  what  may  be  termed 
regular  purchasers.  The  others  participated  in 
only  one  or  two  of  the  issues."  *^  How  successful 
were  the  succeeding  efforts  in  this,  as  in  other  Dis- 
tricts, to  enlist  banking  participation  appears  if  the 
above  figures  be  compared  with  the  response  of 
banks  in  the  New  York  District  to  the  first  six  cer- 
tificate issues  (June  25,  July  9,  July  23,  August  6, 
September  3,  and  September  17,  19 18)  in  anticipa- 
tion of  the  Fourth  Liberty  Loan.  Of  the  1220 
national  banks,  state  banks,  trust  companies  and  sav- 
ings banks  in  the  District  613  subscribed  to  the  first 
issue,  817  to  the  second,  781  to  the  third,  830  to  the 
fourth,  907  to  the  fifth  and  885  to  the  sixth.  Of 
the  621  national  banks,  the  number  of  subscribers 
rose  from  363  to  the  first  issue,  to  516  to  the 
fifth;  of  the  225  state  banks,  from  108  to  the  first 

*^  "  Fourth  Annual  Report  of  the  Federal  Reserve  Board," 
p.  277. 


64 


WAR  BORROWING 


to  177  to  the  fifth;  of  the  196  trust  companies, 
from  123  to  the  first  to  168  to  the  fifth;  of  the  178 
savings  banks,  from  19  to  the  first  to  50  to  the 
fourth.  On  the  other  hand  the  number  of  direct 
private  subscribers  decHned  from  70  to  the  first 
issue  to  44  to  the  second,  to  27  to  the  third  and 
fourth,  respectively,  and  to  26  to  the  sixth. "^^ 

To  a  small  extent  in  the  case  of  the  certificate 
issues  in  anticipation  of  the  First  Liberty  Loan  and 
to  a  large  and  increasing  extent  in  the  case  of  suc- 
ceeding issues,  payment  for  certificates  was  made 
by  subscribing  banks  by  credit.  Full  data  as  to  the 
relative  importance  of  such  credit  payments  are 
available  to  the  writer  only  for  the  certificates  taken 
by  subscribing  banks  in  the  Federal  Reserve  Dis- 
trict of  Boston;  but  it  is  unlikely  that  the  figures 
for  the  country  at  large  are  notably  different  than 
for  this  particular  district: 


1917 


Total  Issued 
in  Boston  Paid  by 

Issue  of  District  Credit 

(000  omitted) 

. .  .  $3,000  


Mar. 

Apr. 

May 

May 

May 

June 

Aug. 

Aug. 

Sept. 

Sept. 

Oct. 

Oct. 

Nov. 


29.... 

25 13.800 

1 2,000 

10 12,167 

25 11,200 

8 18,200 

9 19,400 

28 15,140 

17 12,171 

26 22,174 

18 30,149 

24 33.010 

30 20,921 


$5,450 


3.652 
6,500 
4,593 
5,195 

12,245' 

21,349 
27,590 
20,090 


Per  cent. 
Paid  by 
Credit 


.447 

.200 
.335 
•303 
.426 

•552 
.708 

.835 
.960 


*^  "  List  of  Subscribers  in  Second  Federal  Reserve  District," 
sixth  edition,  September  27,  1918. 


THE  PRESENT  65 

Total  Issued  Per  cent, 

in  Boston  Paid  by  Paid  by 

Issue  of                 District  Credit  Credit 
1918                                        (000  omitted) 

Jan.  2 $16,163  $13,219  .817 

Jan.  22 20,025  17,587  .878 

Feb.  8 29,134  24,870  .853 

Feb.  15 8,790  7,535  .857 

Feb.  27 35,369  30,059  .849 

Mar.  15 6,735  4,864  ,722 

Mar.  20 53,690  49,264  .917 

Apr.  10 39,731  36,084  .908 

Apr.  15 5,220  3,250  .622 

Apr.  22 36,468  27,143  .744 

May  15 24,578  22,238  .905 

June  25 64,590  58,567  .907 

July       9 56,273  51,935  .923 

July  23 48,267  45,173  .936 

Aug.       6 49,509  46,104  .931 

Sept.   3 57,424  52,887  .921 

Sept.  17 54,710  51,107  -935 

Oct.   1 50,378  45,019  -893 

The  first  phase  of  our  war  borrowing  —  the  re- 
current issue  of  loan  anticipation  certificates  of  in- 
debtedness—  has  thus  resolved  itself  very  largely 
into  an  extension  to  the  Treasury  of  deposit  credits 
in  the  form  of  government  deposits,  by  and  through 
financial  institutions  qualified  as  special  depositaries. 
The  second  phase  of  the  borrowing  process  has  been 
the  periodic  flotation  of  Liberty  Loans  into  which 
the  anticipatory  certificates  have  been  funded  or  out 
of  the  proceeds  of  which  the  certificates  have  been 
extinguished  on  or  before  maturity.  Hypotheti- 
cally,  the  simplest  procedure  would  have  been  for 
the  outstanding  certificates  to  have  been  tendered 
by  the  banks  in  payment  of  the  Loan  subscriptions, 
leaving  the  banks  upon  the  completion  of  the  op- 
eration in  possession  of  long-term  bonds  instead  of 


66  WAR  BORROWING 

short-term  certificates.  This  method  was  prudently 
rejected  by  the  Treasury  as  tending  to  defeat  the  de- 
sired ends  of  keeping  the  banking  resources  of  the 
country  in  so  far  as  possible  liquid,  and  of  securing 
the  widest  popular  absorption  of  the  bonds. '^^ 

The  actual  procedure  has  been  for  each  loan 
flotation  to  take  the  form  of  an  intensive  popular 
campaign  in  which  bonds  were  subscribed  by  in- 
dividuals through  banks  and  by  banks  on  their  own 
behalf,  such  subscriptions  being  forwarded  to  the 
Treasury  through  the  Federal  Reserve  Banks  acting 
as  the  fiscal  agents  of  the  Treasury.  In  due  course, 
allotments  have  been  made  by  the  Treasury  through 
the  Federal  Reserve  Banks  to  the  subscribing  banks 
for  the  amounts  taken  in  their  own  behalf  and  for 
their  clients.  Individual  subscribers  have  made 
payment  for  bonds  through  their  banks  by  drawing 
upon  existing  deposit  accounts,  by  creating  new 
loans  and  deposit  credits  and  drawing  directly  or 
indirectly  thereon,  and  by  tendering  cash  items  — 
withdrawn  (unless  taken  from  hoards)  from  cir- 
culation or  from  savings  or  from  other  banks  but 
coming  ultimately  from  the  liquid  resources  of  the 
banks,  that  is,  from  cash  in  vault  in  the  first  in- 
stances and  from  Federal  Reserve  notes  obtained 
by  rediscount  thereafter.  In  turn,  subscribing 
banks  have  made  payment,  over-payment  or  pay- 
ment in  full  through  the  Federal  Reserve  Banks  for 
bonds  allotted  to  them  for  themselves  and  for  their 
customers,  in  three  forms  —  by  tender  of  certifi- 
cates, by  credit,  by  cash  items.  These  modes  of 
payment  have  figured  in  the  heavily  over-paid  first 

*3  Federal  Reserve  Bulletin,  April,  1918,  p.  251. 


THE  PRESENT  67 

installments  of  the  Four  Liberty  Loans  in  the  fol- 
lowing proportions : 

First       Second  Third     Fourth 
[per  centum] 
Part  of  Loan  paid  on  first  in- 
stallment      "Ji  7Z  77  86  ** 

Composition    of    first    install- 
ment payment : 

Certificates    38  17  26  29 

Credit 27  53  47  49 

Cash    35  30  27  22 

A  small  use  of  cash  and  certificates  and  a  heav>' 
use  of  credit  in  payment  of  bond  subscriptions  have 
thus  marked  the  successive  Liberty  Loan  flotations. 
As  to  cash,  payments  have  been  made  by  interior 
banks  by  drafts  upon  the  reserve  banks,  and  by  the 
reserve  banks  by  drafts  upon  their  reserve  balances 
with  Federal  Reserve  Banks  —  this  resulting  in  turn 
in  a  heavy  demand  for  discounts  from  member- 
banks  and  through  them  from  non-member  banks, 
for  the  restoration  of  depleted  reserves. 

As  to  credit,  the  banks  have  followed  the  pro- 
cedure elsewhere  described  —  creating  in  the  spe- 
cial depositaries  new  or  additional  government  de- 
posits to  the  extent  that  payments  have  been  made 
in  this  manner.  Over  and  above  the  two  limita- 
tions operative  in  the  case  of  credit  payments  for 
certificates, —  extent  of  qualification  as  government 
depositaries  and  capacity  of  banking  resources  to 
meet  subsequent  withdrawals  of  government  de- 
posits —  a  third  limitation  has  figured  in  the  re- 
strictions framed  and  to  a  limited  extent  imposed  by 

**  Total  payments  to  December  19,  1918. 


68  WAR  BORROWING 

the  Treasury  as  to  the  relative  amount  permitted 
of  such  credit  payment. 

Both  as  to  the  total  subscription  payments  and, 
more  important,  as  to  the  aggregate  volume  of  cer- 
tificates at  the  time  outstanding,  certificates  of  in- 
debtedness have  been  used  to  a  relatively  minor  ex- 
tent in  the  banks'  payments  for  bond  subscriptions. 
In  the  flotation  of  the  First  Liberty  Loan,  64  per 
cent,  of  the  then  outstanding  and  available  certifi- 
cates was  employed  in  the  payments  made  on  the 
first  installment  date;  in  the  Second  Liberty  Loan 
only  20  per  cent,  was  so  tendered,  in  the  Third  Lib- 
erty Loan  32  per  cent,  was  used,  and  in  the  Fourth 
Liberty  Loan  some  37  per  cent.^^: 

Loan  Certificates 

anticipation  used  in  first 

Certificates  installment  Per 

Liberty  Loan          outstanding  payment  Centum 

First  $   868,205,000  $554,500,000  64 

Second  2,320,495,000  469,000,000  20 

Third    2,612,085,500  82.3,332,600  32 

Fourth   4,659,820,000  1,738,960,950  37 

Reasonable  allowance  made  for  certificates  held 
by  subscribing  banks  in  excess  of  their  subscrip- 
tions, for  certificates  bought  by  individuals,  cor- 
porations and  non-subscribing  banks  for  investment 
purposes,  and  for  certificates  used  in  later  install- 
ment payments  —  it  still  appears  true  that  in  effect- 
ing settlement  for  Liberty  Loan  subscriptions  the 
banks  of  the  country  elected  and  were  permitted  to 
make  large  use  of  payment  by  credit  and  to  retain  a 
substantial   amount   of   their   certificates   as    short- 

*^  To  December  19,  1918. 


THE  PRESENT  69 

term  investments.  On  the  part  of  the  banks  a  con- 
siderable advantage  resulted  in  the  margin  of  profit 
between  the  interest  yield  of  retained  certificates 
and  the  lower  rate  paid  upon  government  deposits 
established  by  credit.  On  the  part  of  the  Treasury, 
there  appeared  an  unreal  addition  to  the  net  bal- 
ance through  the  non-redemption  of  such  part  of 
the  anticipatory  certificates  of  indebtedness.  Of 
direct  fiscal  significance,  the  collateral  effects  of 
this  procedure  in  relation  to  the  money  market  and 
the  expansion  of  credit  have  been  perhaps  of  even 
greater  importance. 


THE  TREASURY 


Ill 

THE  TREASURY 

Short-term  borrowing  is  an  accredited  expedient 
of  war  financing.  The  Treasury  must  be  put  in 
ready  command  of  large  funds  immediately  upon 
the  declaration  of  hostilities;  and  for  the  consid- 
erable time  elapsing  before  sources  of  extraordi- 
nary revenue  —  war  taxes  and  funded  loans  —  be- 
come productive  there  is  likely  to  be  need  of  an- 
ticipatory borrowing.  The  excesses  to  be  avoided 
are  ( i )  undue  reliance  upon  temporary  loans  in 
lieu  of  definitive  revenue,  with  the  possibility  of  em- 
barrassing refunding  operations  at  perhaps  critical 
intervals;  and  (2)  entry  upon  a  policy  of  short- 
term  borrowing  with  insufficient  banking  machin- 
ery, with  the  danger  of  descent  to  bills  of  credit 
and  fiat  notes.  These  conclusions  may  fairly  be  de- 
scribed as  in  conformity  with  accepted  fiscal  theory 
and  as  realized  in  familiar  fiscal  practice. 

As  employed  by  the  United  States  in  the  present 
war,  short-term  obligations  in  the  form  of  certifi- 
cates of  indebtedness  have  served  a  larger  purpose. 
They  have  indeed  been  used  in  the  traditional  way, 
at  the  outset  and  to  a  very  limited  extent,  to  bridge 
over  the  initial  interval  until  war  loans  and  war 
taxes  should  become  productive.  But  much  beyond 
this,  certificates  of  indebtedness  have  been  continu- 

7i 


74  WAR  BORROWING 

ously  employed  thereafter  to  keep  the  Treasury  in 
funds  for  war  expenditure,  by  issue  in  anticipa- 
tion of  the  proceeds  of  funded  loans  and  extraordi- 
nary taxes.  In  short,  the  war  has  been  largely 
financed  by  resort  to  short-term  borrowings,  peri- 
odically liquidated  from  the  proceeds  of  long-term 
loans  and  to  a  less  extent  from  the  proceeds  of  war 
taxes. 

Assuming  that  certificates  of  indebtedness  are  a 
valid  device  for  effecting  the  initial  borrowing  inci- 
dent to  war  financing,  it  remains  to  inquire  whether 
the  larger  and  continuous  use  to  which  the  certifi- 
cates have  been  put  has  been  justified  by  direct  fiscal 
result.  In  succeeding  chapters  examination  will  be 
made  of  the  collateral  results  which  have  attended 
such  use,  in  relation  to  the  business  world  and  to 
general  well  being. 

With  respect  to  the  direct  part  played  by  cer- 
tificates of  indebtedness  in  our  war  financing,  the 
course  of  Treasury  operations  from  the  period  just 
before  our  entry  into  the  war  up  to  the  present  time 
may  be  distinguished  into  thirteen  periods,  as  fol- 
lows : 

Period  Date  Treasury  Operations 

1917 

1.  March  31-ApriI  21 certificate  issue  in  anticipation 

of  1917  income  taxes 

2.  April  25-June  8 certificate  issues  in  anticipation 

of  First  Liberty  Loan 

3.  June  15-June  30 First  Liberty  Loan 

4.  June  30-August  9 reliance    on    net    proceeds    of 

First  Liberty  Loan 

5.  August  9-October  24 certificate  issues  in  anticipation 

of  Second  Liberty  Loan 


THE  TREASURY 


75 


Period  Date  Treasury  Operations 

1917 

6.  October  27-November  20.  ..Second  Liberty  Loan 

7.  November  20-January  2. .  .reliance  on  net  proceeds  of  Sec- 

ond Liberty  Loan;  certificate 
issues  in  anticipation  of  1918 
income    and    excess     profits 
taxes 
1918 

8.  January  2-April  22 certificate    issues    in    anticipa- 

tion of   Third   Liberty  Loan 

9.  May  4-May  28 Third  Liberty  Loan 

10.  May  28-June  25 reliance    on    net    proceeds    of 

Third  Liberty  Loan 

11.  June  2S-October  i certificate  issues  in  anticipation 

of  Fourth  Liberty  Loan ;  cer- 
tificate issue  in  anticipation 
of  1919  income  and  excess 
profits  taxes 

12.  October  19-October  24 Fourth  Liberty  Loan 

13.  [October  24-December   5]. reliance    on    net    proceeds    of 

Fourth  Liberty  Loan 

These  thirteen  periods  may  obviously  be  ar- 
ranged, after  an  ante-bellum  prelude,  into  four  like 
cycles,  each  constituted  of  (a)  a  period  of  antici- 
patory certificate  issues,  (b)  the  flotation  of  a  Lib- 
erty Loan  and  (c)  the  use  of  the  net  proceeds  of 
the  Loan: 

Cycle  Certificate                      Loan                   Use  of  loan 

1917  issues                        flotation                    proceeds 

I  Apr.   25-June  8  June  15-June  30  June  30-Auff.  9 

II  Aug.   9-Oct.   24  Oct.  27-Nov.  20  Nov.  20-Jan.  2 

1918 


III  Jan.    2-Apr.    22     May  4-May  28 

IV  June   25-Oct.    I    Oct.  19-Oct.  24 


May  28-June  25 
[Oct.   24-Dec.   s] 


The  actual  experience  of  the  Treasury  in  this 
cyclical  movement  may  now  be  briefly  reviewed.  It 
is  conveniently    illustrated    by    the    accompanying 


76  WAR  BORROWING 

graph  showing  the  course  of  the  daily  "  net  bal- 
ance "  of  the  Treasury  during  the  period  under 
review.^ 


The  three  months  that  preceded  our  entry  into 
the  war  were  marked  by  a  steady  excess  of  dis- 
bursements over  receipts.  Starting  with  a  net  bal- 
ance of  $113,597,985  on  January  2,  1917,  the  avail- 
able funds  of  the  Treasury  declined  practically  with- 
out arrest.  On  February  23,  19 17,  there  was  for 
the  first  time  an  actual  deficiency  as  compared  with 
the  authorized  but  undrawn  amount  to  the  credit  of 
disbursing  officers,  and  a  week  earlier  the  "  daily 
statement  "  had  begun  to  note  that  "  the  income 
tax,  constituting  a  large  part  of  the  Government's 
revenue,  is  not  collected  until  June,"  and  to  present 
the  estimated  amount  payable  at  that  time. 

The  Treasury  balance  touched  its  low  point  on 
March  15,  1917,  at  $52,951,594.  For  the  next  two 
weeks  some  restraint  was  apparently  put  upon  dis- 
bursements ;  but  on  March  30  the  nominal  deficiency 
as  against  disbursing  officers'  credits  was  nearly 
$10,000,000,  with  a  further  immediate  requirement 
of  $25,000,000  in  settlement  of  the  Danish  West 
Indies  purchase.  The  provision  of  additional 
funds  could  not  be  delayed,  and  on  March  31,  191 7, 
the  Treasury,  in  anticipation  of  the  income  taxes 
payable  in  June,   borrowed  $50,000,000   from  the 

1  See  frontispiece.  T  am  indebted  to  Mr.  Leopold  Olceowski 
of  Washington,  D.  C,  for  the  transformation  of  my  own 
rough  grapifi  into  the  finished  chart. 


THE  TREASURY  jy 

Federal  Reserve  Banks  by  an  issue  of  ninety  days, 
two  per  cent,  certificates  of  indebtedness. 

In  the  first  weeks  of  our  actual  participation  in 
the  war,  the  operations  of  the  Treasury  presented 
no  unusual  features.  Disbursements  —  peace  and 
war  —  mounted  slowly,  and  the  revenue  trickling 
from  war  taxation  showed  signs  of  appreciable  in- 
crease. The  immediate  problem  loomed  up  from 
another  quarter  —  credit  advances  to  the  Allies. 
The  First  Liberty  Loan  act  had  appropriated  the 
huge  sum  of  $3,000,000,000  nominally  "  out  of  any 
money  in  the  Treasury  not  otherwise  appropriated," 
but  in  reality  from  out  of  the  proceeds  of  bonds  and 
certificates  therein  authorized  to  be  expended  in 
so  far  as  necessary  in  the  purchase  of  the  obligations 
of  foreign  governments.  The  requirements  of 
Great  Britain  as  to  "  dollar  credits  "  were  in  par- 
ticular urgent,  and  the  necessities  of  France  and 
Italy  were  only  a  degree  less  pressing. 

On  April  21,  19 17,  the  Treasury  offered  the 
initial  issue  of  certificates  of  indebtedness  in  an- 
ticipation of  the  First  Liberty  Loan,  and  immedi- 
ately upon  the  passage  of  the  Loan  act  three  days 
later  made  allotments  to  the  amount  of  $268,205,- 
000.  Of  the  proceeds  $200,000,000  was  at  once 
advanced  to  the  British  Government  and  ten  days 
later  $125,000,000  to  the  French  and  Italian  Gov- 
ernments, practically  exhausting  the  certificate  pro- 
ceeds. In  reflection,  the  Treasury  balance  moved 
from  $83,617,332  on  April  24  to  $165,791,262  on 
May  2,  dropping  back  thereafter  to  $54,757,198  on 
May  9  —  the  lowest  point  touched  since  the  begin- 
ning of  the  calendar  year. 


78  WAR  BORROWING 

By  this  time,  however,  the  Treasury's  plans  for 
successive  issues  of  certificates  had  definitely  ma- 
tured. At  fortnightly  intervals  —  May  lo,  May 
25,  June  8  —  issues  of  $200,000,000  each  were  al- 
lotted. Of  the  $600,000,000  thus  realized,  no  less 
than  $560,000,000  was  advanced  to  the  Allies  to 
June  29,  1 91 7,  leaving  as  the  Treasury  balance  on 
that  date  $299,830,457.  with  $417,748,467  (June 
9)  and  $149,682,891  (May  21)  as  the  high  and 
low  points  intervening.  The  funds  derived  from 
certificate  borrowing  were  carried  as  a  government 
deposit  with  the  Federal  Reserve  Banks  up  to  May 
25,  after  which  time  the  proceeds  of  certificate  is- 
sues were  redeposited  with  subscribing  banks  quali- 
fied as  special  depositaries  and  were  remitted  to  the 
Federal  Reserve  Banks  for  disbursement  as  required 
for  public  expenditure. 

Subscription  lists  to  the  First  Liberty  Loan  closed 
on  June  16,  with  an  aggregate  subscription  of  $3,- 
035,226,850  and  an  actual  allotment  of  $2,000,000,- 
000.  In  the  light  of  the  Treasury's  prospective  re- 
quirements and  the  clear  alternative  of  early  resort 
to  further  certificate  borrowing,  it  is  incomprehen- 
sible that  no  part  of  the  oversubscription  should 
have  been  accepted.  A  preliminary  payment  of  two 
per  cent,  was  due  on  June  15  and  a  further  install- 
ment of  18  per  cent,  on  June  28,  making  the  amount 
certainly  available  on  that  date  $400,000,000.  As 
a  matter  of  fact  there  was  heavy  over-payment  of 
the  installment,  the  receipts  on  account  of  the  Loan 
up  to  June  30  totalling  $1,458,400,000  or  73  per  cent, 
of  the  principal.  The  over-payment  was  not  limited 
to  any  particular  section.     In  the  New  York  dis- 


THE  TREASURY  79 

trict  the  ratio  of  payment  to  allotment  was  92  per 
cent,,  as  it  also  was  in  the  St.  Louis  district.  But 
in  the  Chicago  district  the  lowest  ratio  was  realized, 
52  per  cent. ;  and  in  the  Boston  district  this  was  not 
greatly  exceeded,  62  per  cent. 

The  Treasury  had  made  some  effort  to  restrain 
overpayment  by  requiring  large  subscribers  to  give 
two  weeks  notice  of  their  intention  to  pay  in  excess 
of  the  installment  quota.  But  the  amount  and  in- 
deed the  composition  of  the  over-payment  must 
have  been  known  in  advance  with  some  exactness. 
As  soon  as  possible  after  May  29  every  subscribing 
bank  desirous  of  being  designated  as  a  government 
depositary  under  the  loan  had  been  required  to 
notify  the  Treasury  as  to  :  (a)  the  amount  of  bonds 
subscribed  for  by  or  through  it;  (b)  the  amount 
of  payment  to  be  made  by  it  on  or  before  June  28 ; 
(c)  the  amount  of  such  payment  to  be  made  in 
cash;  (d)  the  amount  of  such  payment  to  be  made 
in  certificates. 

The  composition  of  this  payment  ^  —  or  over-pay- 
ment —  of  the  first  installment  at  the  Federal  Re- 
serve Banks  is  shown,  approximately,  in  the  sub- 
joined table : 

Cash   $518,300,000 

Credit   385,600,000 

Certificates    554.500,ooo 

Total    $1,458,400,000 

At  the  time  the  installment  was  due  (June  28) 
there  were  outstanding  $868,205,000  certificates  is- 
sued in  anticipation  of  the  Loan.     Assuming  that 

2  Federal  Reserve  Bulletin,  August,  1917,  p.  578. 


8o  WAR  BORROWING 

among  the  certificates  tendered  in  payment  of  the 
first  installment  was  the  entire  issue  maturing  June 
30,  19 1 7,  there  would  have  remained  outstanding 
some  $300,000,000  certificates  retained  by  the  banks 
or  their  customers  as  investments  instead  of  being 
tendered  in  payment  of  bond  subscriptions.  To 
this  extent  the  over-payment  resulted  in  swelling 
the  Treasury  balance  at  the  expense  of  leaving  a  cor- 
responding amount  of  the  certificates  of  indebted- 
ness unliquidated.  The  significance  of  payment  by 
credit,  as  distinct  from  cash  or  certificate  payment, 
has  to  do  with  the  general  question  of  credit  ex- 
pansion consequent  upon  the  certificate  issues  and 
will  be  examined  in  another  connection.^ 

The  fiscal  results  of  the  Loan  flotation  appeared 
in  an  abrupt  increase  of  the  Treasury  balance  from 
$299,830,457  on  June  29  to  $1,064,086,250  on  June 
30.  Of  this  latter  amount  $305,743,526  was  in  the 
form  of  government  deposits  with  the  Federal 
Reserve  Banks,  and  $714,841,218  with  member 
banks  qualified  as  special  depositaries  —  this  in  turn 
being  distinguished  as  $560,662,218  on  account  of 
Loan  proceeds  and  $154,179,000  on  account  of  cer- 
tificates. Moreover  the  flotation  had  made  possible 
by  redemption  at  maturity  and  by  acceptance  in  pay- 
ment of  the  Loan  installment  the  discharge  of  $626,- 
196,844  certificates  of  indebtedness,  reducing  the 
amount  then  outstanding  to  some  $260,000,000. 

The  issue  of  the  "  daily  statement  "  of  the  Treas- 
ury was  suspended  on  June  29,  19 17,  and  not  again 
renewed  until  July  23,  19 17,  on  which  date  the 
statement  for  June  30,  19 17,  was  first  made  public. 

3  Page  129,  below. 


THE  TREASURY  8i 

This  gap  makes  it  impossible  to  follow  in  detail  the 
operations  of  the  Treasury  in  the  weeks  immediately 
following  the  Loan  flotation.  The  consolidated 
statement  for  the  interval  (July  2  —  July  23) 
shows,  however,  that  during  this  period  there  was 
advanced  to  the  Allies  $375,000,000  and  expended 
in  ordinary  disbursements  $157,149,769. 

By  July  24,  19 1 7,  the  Treasury  balance  stood  at 
$494,394,365,  of  which  $158,296,453  was  in  the 
Federal  Reserve  Banks  and  $320,264,871  in  the 
special  depositaries  on  account  of  Loan  receipts. 
Three  installments  on  account  of  the  First  Liberty 
Loan  remained  unpaid,  nominally  to  the  amount  of 
$541,000,000;  but  of  this  only  20  per  cent,  was  due 
on  July  30,  30  per  cent,  being  payable  on  August 
15,  and  30  per  cent,  on  August  30.  Revenue  from 
taxation,  even  with  the  important  schedules  of  the 
war  tax  act  then  in  operation,  offered  no  adequate 
relief.  The  19 17  income  tax  payments  were  largely 
completed  by  June  22,  and  the  total  ordinary  re- 
ceipts of  the  Treasury  were  actually  less  in  July 
and  August  than  in  the  months  immediately  follow- 
ing the  declaration  of  war.  On  the  other  hand,  a 
definite  obligation  lay  immediately  ahead  in  the 
maturity  on  July  30  of  the  outstanding  parts  of  the 
certificate  issues  of  May  25  and  June  8,  and  be- 
tween July  24  and  August  14  the  Treasury  disbursed 
$265,648,579  for  this  purpose. 

The  graver  problems  of  the  Treasury  had  to  do 
with  the  huge  financial  requirements  of  the  Allies 
and  with  our  own  swiftly  mounting  expenditures 
for  national  defense.  Of  the  two  demands,  the 
Allies'  loans  were  the  larger  absolutely  —  beginning 


82  WAR  BORROWING 

with  $410,432,295  in  May,  then  recovering  from 
an  enforced  restraint  of  $277,500,000  in  June,  to 
$452,500,000  in  July,  and  to  $478,000,000  in 
August.  Our  own  expenditures,  including  interest 
on  public  debt,  were  less  in  outright  amount  but  far 
more  ominous  in  swift  progression  —  $114,102,- 
809  in  May,  $134,304,040  in  June,  $208,299,031  in 
July,  $277,438,000  in  August.'*  The  last  of  the 
outstanding  certificates  had  matured  on  July  30,  and 
the  Treasury  was  for  the  first  time  since  the  out- 
break of  the  war  entirely  free  from  short-term 
obligations.  But  on  the  other  hand  the  Treasury 
balance  dropped  below  $300,000,000  early  in 
August  and  substantial  reinforcement  became  im- 
perative, confirming  the  unwisdom  of  the  Treas- 
ury's rejection  of  the  entire  over-subscribed  part 
of  the  First  Liberty  Loan. 

II 

The  second  cycle  of  our  war  financing  began  on 
August  9,  1 91 7.  With  a  reduced  Treasury  balance 
at  the  outset,  with  the  receipts  from  the  First 
Liberty  Loan  exhausted,  with  a  relatively  incon- 
siderable revenue  from  war  taxation,  with  Allies' 
requirements  of  undiminished  magnitude,  with  our 
own  expenditures  for  the  national  defense  mounting 
progressively,  with  a  second  funded  loan  in  con- 
templation and  with  no  outstanding  short-term 
obligations  —  the  Treasury  in  pursuance  of  the 
policy  now  definitely  established  undertook  to  meet 

*  "  Monthly  Summary  of  Foreign  Commerce  of  the  United 
States,"  Febrviary,  1918,  p.  93. 


THE  TREASURY  83 

its  needs  by  successive  issues  of  certificates  of  in- 
debtedness in  anticipation  of  the  proceeds  of  a  pros- 
pective loan. 

In  the  succeeding  three  months  there  were  issued 
six  series  of  certificates  of  an  aggregate  volume  of 
$2,320,493,000,  as  above  described.  The  intervals 
were  approximately  three  weeks,  with  shorter 
periods  preceding  the  issues  of  September  26  and 
October  24.  The  controlling  policy  seems  to  have 
been  to  keep  the  Treasury  in  funds  above  the  three 
hundred  million  mark.  Graphically,  the  course  of 
the  available  balance  represents  a  succession  of  six 
peaks,  the  high  points  indicating  the  receipts  from 
certificate  borrowing,  the  low  points  constituting 
a  "  pegged  "  minimum  between  $300,000,000  and 
$400,000,000. 

The  subscriptions  to  the  Second  Liberty  Loan 
closed  on  October  27,  1917,  with  a  total  of  $4,617,- 
532,300  or  approximately  an  over-subscription  of  54 
per  cent,  of  the  amount  offered.  One  half  of  the 
oversubscription  was  accepted,  making  the  total 
issue  $3,808,766,150,  and  again  presenting  the 
question  as  to  whether  non-acceptance  of  any  part 
of  the  over-subscription  was  under  existing  fiscal 
conditions  justifiable.  The  provision  for  install- 
ment payment  was  18  per  cent,  on  November  15, 
1917,  (exclusive  of  2  per  cent,  with  application)  ;  40 
per  cent,  on  December  15,  19 17,  and  40  per  cent, 
on  January  15,  1918.  As  in  the  case  of  the  First 
Liberty  Loan  there  was  heavy  overpayment  in  con- 
nection with  the  first  installment  and  in  almost 
identical  proportion.  Instead  of  the  $761,753,230 
due  at  that  time,  there  was  received  by  the  Treasury 


84  WAR  BORROWING 

approximately,    $2,787,000,000  —  constituting    73 
per  cent,  of  the  total  issue,  as  compared  with  72.9 
per  cent,  in  the  case  of  the  First  Liberty  Loan. 
The  composition  of  the  payment  was  as  follows  ^  : 

Cash  $  841,000,000 

Credit    1,477,000,000 

Certificates   469,000,000 

Total    $2,787,000,000 

The  striking  fact  in  the  payment  was  the  rela- 
tively small  use  of  certificates  and  the  correspond- 
ingly large  use  of  credit.  This  was  not  apparently 
in  consequence  of  any  formal  administrative  re- 
straint. Subscribers  were  permitted  to  make  pay- 
ment on  November  15,  1917,  in  certificates  of  any 
maturity;  whereas,  for  the  later  installments  of 
December  15,  1917,  and  January  15,  1918,  only  the 
maturities  of  the  corresponding  dates  were  eligible. 

The  minor  role  played  by  certificates  becomes  even 
more  evident  if  the  composition  of  the  first  install- 
ment payments  in  the  case  of  the  two  Liberty  Loans 
be  compared : 

First  Loan     Second  Loan 
(per  centum) 

Certificates    38  17 

Cash    35  30 

Credit    27  53 

100  100 

It  thus  appears  that  the  relative  parts  of  the  two 
modes  of  payment  underwent  inverse  change,  the 
percentage  of  credit  payment  doubling  and  that  of 
certificate  payment  being  cut  in  half.     The  extent  to 

•'"'  Federal  Reserve  Bulletin,  December,  1917,  p.  919. 


THE  TREASURY  85 

which  certificates  may  be  used  in  loan  payment 
obviously  stands  in  relation  not  only  to  the  aggre- 
gate amount  of  the  payment  but  also  to  the  volume 
of  outstanding  certificates.  The  facts  here  w^ere 
favorable  to  a  larger  use  of  certificates  in  Novem- 
ber than  in  June.  At  the  time  of  the  First  Liberty 
Loan  there  were  outstanding  $868,205,000  certifi- 
cates or  43  per  cent,  of  the  loan  principal ;  at  the 
time  of  the  Second  Liberty  Loan  there  were  out- 
standing $2,320,493,000  or  61  per  cent,  of  the  loan 
principal.  Moreover,  if  we  make  the  reasonable 
assumption  that  the  investment  absorption  of  cer- 
tificates does  not  proceed  at  equal  pace  with  the 
volume  emitted,  but  that  the  larger  the  amount 
outstanding  the  larger  will  be  the  amount  of  certifi- 
cates taken  by  the  banks  on  their  own  account,  it 
would  follow  that  a  larger  proportion  of  certificates 
should  have  been  tendered  by  subscribing  banks  in 
connection  with  the  Second  than  in  connection  with 
the  First  Liberty  Loan. 

As  a  matter  of  fact,  assuming  that  the  entire  issue 
of  $300,000,000  certificates  maturing  on  November 
15,  19 1 7,  were  among  the  certificates  tendered  on 
that  date  on  account  of  the  Loan  installment,  there 
would  have  been  only  $169,000,000  of  later  ma- 
turities likewise  tendered,  as  compared  with  a 
further  outstanding  amount  of  $1,851,000,000  that 
might  have  been  but  were  actually  not  so  used.  To 
this  extent  the  flotation  again  resulted  in  a  plethora 
of  available  funds  at  the  expense  of  an  unliquidated 
floating  debt. 

The  Treasury  thus  emerged  from  the  Loan  flo- 
tation with  an  embarrassing  surplus  and  a  large 


86  WAR  BORROWING 

volume  of  outstanding  short-term  obligations.  On 
November  15,  191 7,  the  Treasury  balance  stood  at 
$801,983,785.  A  fortnight  later  ^  with  the  pro- 
gress of  the  Loan  flotation  it  had  attained  the  height 
of  $1,968,484,725,  and  on  November  30,  1917,  it 
was  still  at  $1,837,419,886  —  despite  the  redemp- 
tion of  the  October  18,  191 7,  issue  of  certificates 
($385,197,000)  maturing  November  22,  1917,  and 
the  August  28,  19 1 7,  issue  ($250,000,000)  matur- 
ing November  30,  191 7.  On  the  other  hand  the 
certificate  issues  of  September  17,  September  26, 
and  October  24,  19 17,  of  a  nominal  aggregate  of 
$1,385,296,000  were  due  on  December  15,  19 17. 

Two  courses  were  now  open  to  the  Treasury  in 
meeting  this  combined  problem  of  surplus  funds  and 
of  maturing  short-term  obligations.  The  one  was 
to  conserve  the  Treasury  balance  for  current  dis- 
bursements and  to  rely  on  further  borrowings  to 
meet  the  maturing  certificate  issues.  The  other  was 
to  use  surplus  funds  to  redeem  outstanding  certifi- 
cate issues  before  maturity,  and  to  provide  for 
future  expenditures  by  new  short-term  borrowings. 
The  procedure  followed  was  in  the  main  the  second 
course :  two  issues  of  certificates  were  called  for 
redemption  before  maturity,  and  provision  was 
made  for  further  issues  of  certificates. 

The  reason  assigned  for  earlier  redemption  was 
the  danger  of  disturbance  in  the  money  market  by 
the  heavy  withdrawal  of  funds  that  must  otherwise 
have  occurred  on  December  15,  19 17.  Certainly,  a 
further  advantage  was  the  reduction  of  the  swollen 
Treasury  balance.     On  November  22,  19 17,  the  Sec- 

8  November  23,  1917. 


THE  TREASURY  87 

retary  of  the  Treasury  called  the  issue  of  September 
17,  19 1 7,  ($300,cxDO,ooo)  for  redemption  on  De- 
cember 6,  19 1 7,  and  the  issue  of  September  26, 
1 917,  ($400,000,000)  for  redemption  on  December 
II,  1917  —  both  issues  otherwise  maturing  on  De- 
cember 15,  19 1 7.  The  last  remaining  issue  in  an- 
ticipation of  the  Second  Liberty  Loan,  that  of 
October  24,  19 17,  to  the  amount  of  $685,296,000, 
was  not  redeemed  until  maturity  on  December  15, 
191 7,  the  transaction  then  being  aided  by  the  receipt 
of  $597,614,026  as  the  second  installment  on  ac- 
count of  the  Loan. 

In  the  surfeit  of  its  feast,  the  Treasury  yet  faced 
the  menace  of  a  famine.  Seemingly  ample  as  were 
its  available  funds  after  the  payment  of  the  install- 
ment of  November  20,  19 17,  the  Treasury  balance 
was  approximately  only  some  $300,000,000  in  excess 
of  the  certificates  of  indebtedness  maturing  within 
the  succeeding  three  weeks.  The  unpaid  install- 
ments of  the  Second  Liberty  Loan  were  nominally 
$1,022,000,000;  but  probably  one-half  of  this  could 
not  be  counted  upon  as  available  before  the  third 
installment  date  on  January  15,  19 18.  As  against 
these  unpaid  installments  further  issues  of  certifi- 
cates could  not  readily  be  used;  another  Liberty 
Loan  was  not  in  such  immediate  contemplation  as 
to  justify  anticipatory  borrowings  at  this  time,  and 
the  revenue  flowing  from  taxation  and  war  savings 
certificates  was  obviously  inadequate. 

On  November  20,  19 17,  the  Treasury  invited 
subscriptions  to  the  first  series  of  certificates  issued 
in  anticipation  of  the  war  income  and  excess  profits 
taxes,  payable  in  June,  19 18,  and  $691,872,000  were 


88  WAR  BORROWING 

allotted.  This  procedure  was  repeated  a  month 
later  in  a  further  series  dated  January  2,  19 18,  the 
subscriptions  to  which  aggregated  $491,822,500. 

The  immediate  effect  was  to  aggravate  the 
Treasury  plethora  for  a  season.  The  net  balance 
had  receded  from  the  high  point  $1,968,484,725  on 
November  23  to  $1,837,419,886  on  November  30. 
But  on  the  following  day,  December  i,  19 17,  with 
the  receipt  of  the  proceeds  of  the  new  certificates 
it  attained  the  record  height  of  $2,515,471,407.  In 
the  next  two  weeks  and  a  half,  the  outstanding 
parts  of  all  issues  of  certificates  put  out  in  anticipa- 
tion of  the  Second  Liberty  Loan  were  called  for 
redemption  or  paid  off  upon  maturity,  to  an 
aggregate  amount  of  $  1,337,960,440;  there  was 
advanced  to  the  Allies  some  $317,500,000 ;  and  there 
was  disbursed  in  ordinary  expenditure  $403,138,459. 
On  December  19,  1917,  the  available  balance  was 
back  again  at  $775,899,891.  But  on  the  other  hand 
the  Treasury  was  for  the  first  time  since  July  free 
from  all  short-term  obligations,  other  than  the  new 
series  of  certificates  issued  in  anticipation  of  the  war 
taxes. 

For  the  next  month  receipts  from  the  January 
issue  of  tax  anticipation  certificates,  together  with 
the  final  installment  of  the  Liberty  Loan  payable 
on  January  15,  19 17,  were  enough  with  ordinary 
revenues  to  meet  the  Treasury's  requirements.  On 
January  22,  19 17,  the  Treasury  balance  was  $763,- 
830,030,  having  touched  $653,449,458  as  the  low 
point  in  the  interval  —  and  the  second  cycle  in  our 
war  financing  may  be  said,  with  this  downward  ten- 
dency, to  have  been  completed. 


THE  TREASURY  89 


III 

On  January  22,  19 18,  the  Treasury  entered  upon 
the  third  cycle  of  its  war  financing  —  short-term 
borrowings  in  anticipation  of  a  Third  Liberty  Loan. 
The  characteristic  of  the  first  phase,  as  compared 
with  that  of  the  preceding  cycles,  was  the  greater 
regularization  of  procedure.  An  issue  of  $400,000,- 
000  certificates,  dated  January  22,  was  succeeded 
three  weeks  later  by  an  announced  program  of  fort- 
nightly issues  of  $500,000,000  each.  The  first  of 
such  issues  was  made  on  February  8,  1918,  and  was 
followed  by  like  emissions  bearing  date  of  February 
2y,  March  20,  ($543,032,500),  April  10,  ($551,- 
226,500),  and  April  22,  ($517,826,500).  In  ad- 
dition the  Treasury  disposed,  in  "  over  the 
counter  "  sale  through  the  banks,  of  three  monthly 
series  of  tax  anticipation  certificates  to  an  aggregate 
amount  of  $256,924,000.  Finally,  the  current 
yield  of  war  taxation  became  more  productive,  the 
ordinary  receipts  of  the  Treasury  being  $565,951,- 
•791  for  the  first  four  months  of  19 18,  as  compared 
with  $409,442,777  for  the  last  four  months  of  19 17. 

The  largest  part  of  this  flood  of  incoming  revenue 
was  absorbed  by  the  rapid  increase  in  war  disburse- 
ments despite  a  marked  decline  in  the  Treasury's 
advances  to  the  Allies.  The  Allies  received  only 
$370,200,000  in  January,  $325,000,000  in  Feb- 
ruary, $317,500,000  in  March  and  $287,500,000  in 
April,  as  compared  with  $471,929,750  in  November 
and  $492,000,000  in  December.  But  the  Treas- 
ury's "  ordinary  disbursements  "  including  interest 


90  WAR  BORROWING 

paid  on  the  public  debt  mounted  from  $611,297,425 
in  December,  to  $715,302,039  in  January,  to  $665,- 
400,691  in  February,  to  $820,126,181  in  March,  to 
$910,756,758  in  April. '^  In  reflection,  the  Treasury 
balance  moved  rhythmically  and  within  fairly  uni- 
form hmits  —  rising  above  $1,100,000,000  with 
successive  certificate  issues  and  dropping  back  to 
some  $800,000,000  in  the  intervals.  Starting  with 
$763,830,030  on  January  22  at  the  beginning  of  the 
period,  the  balance  was  again  $835,279,426  on  May 
3,  and  $784,535,899  on  May  11,  1918  —  the  eve  of 
the  Third  Liberty  Loan  flotation. 

Subscriptions  to  the  Third  Liberty  Loan  aggre- 
gated $4,170,019,650  and  this  full  amount  was 
allotted.  The  terms  of  subscription  called  for  in- 
stallment payments  of  5  per  cent,  on  May  4-9,  20 
per  cent,  on  May  28,  35  per  cent,  on  July  18  and 
40  per  cent,  on  August  15,  with  option  of  over- 
payment or  payment  in  full  at  any  installment  date. 
The  flotation  was  marked  by  an  even  heavier  over- 
payment of  the  first  installment  than  had  dis- 
tinguished the  two  preceding  loans.  On  June  i, 
1918,  it  was  stated  that  "  of  the  entire  amount  of 
subscriptions  received,  it  is  estimated  that  more  than 
80  per  cent,  is  already  fully  paid."  ^  The  final 
figures  showed  that  payments  up  to  May  28  aggre- 
gated $3,211,967,452  or  yy  per  cent,  of  the  nominal 
amount  of  the  loan.  The  actual  payments  were 
constituted  as  follows :  ^ 

■^ "  Monthly  Summary  of  the  Foreign  Commerce  of  the 
United  States,"  August,  1918,  p.  95. 

8  Federal  Reserve  Bulletin,  June,  1918,  p.  484. 

9  Federal  Reserve  Bulletin,  July,  1918,  p.  s8i8. 


THE  TREASURY  91 

Cash  $   878,865,549  27% 

Credit    1,509,869,1 12  47% 

Certificates     823,332,600  26^0 

Total    $3,21 1,967,452  100% 

The  Loan  flotation  was  reflected  in  a  precipitate 
increase  of  the  Treasury  balance  from  $784,535,899 
on  May  ij,  to  $1,360,380,795  on  May  13,  to  $1,- 
831,757,889  on  May  20  —  the  high  point  —  and 
back  to  $1,528,165,052  on  May  28.  The  unpaid  in- 
stallments of  the  Loan,  due  after  the  heavy  over- 
payment of  May  28,  held  forth  promise  of  some 
$950,000,000  to  accrue  during  July  and  August. 
But  on  the  other  hand  loan  anticipation  certificates 
of  indebtedness  of  June  and  July  maturities  were 
still  outstanding  after  May  28  to  a  nominal  amount 
of  $1,612,085,500.  The  yield  of  income  and  excess 
profits  taxes  payable  on  June  25  had  been  in  part 
anticipated  by  the  six  series  of  tax  anticipation  cer- 
tificates designed  for  such  payments  issued  in  the 
preceding  seven  months  to  an  aggregate  amount  of 
$1,624,403,500.  The  actual  collections  from  1918 
income  and  excess  profits  taxes  for  the  fiscal  year 
ended  June  30,  1918,  were  $2,839,083,585;  so  that, 
over  and  above  the  certificates  tendered,  the  Treas- 
ury may  be  supposed  to  have  received  some  $1,200,- 
000,000  current  funds  from  this  source.^'* 

Although  provision  of  additional  revenue  could 
not  have  been  long  thereafter  delayed,  the  Treasury 
might  thus  have  safely  continued  through  to  the  end 
of  the  fiscal  year  without  recourse  to  renewed  bor- 

10  "Internal  Revenue  Collections  for  the  fiscal  year  1918: 
Preliminary  Statement,  September  14,  1918." 


92  WAR  BORROWING 

rowing.  Total  ordinary  disbursements  for  June 
were  notably  greater  than  for  May  —  $1,263,914,- 
905  as  compared  with  $1,068,203,026;  but  advances 
to  the  Allies  were  less  almost  by  the  same  amount  — 
$242,700,000  as  compared  with  $424,000,000.^^ 
There  was,  however,  seeming  reluctance  on  the  part 
of  the  Treasury  to  tolerate  any  considerable  re- 
duction in  its  net  balance  or  indeed  to  modify  the 
policy  of  progressive  increase,  and  preparations 
were  made  for  further  anticipatory  borrowing  — 
thus  terminating  the  third  cycle  of  the  Treasury's 
operations. 

IV 

On  June  12,  19 18,  announcement  was  made  by 
the  Treasury  of  the  program  of  fortnightly  cer- 
tificate borrowing  in  anticipation  of  the  Fourth 
Liberty  Loan.  On  June  25,  with  the  net  balance 
standing  at  $1,531,894,060  the  first  of  such  issues 
was  allotted  to  the  amount  of  $839,646,500.  In 
the  succeeding  three  months,  six  additional  issues 
were  emitted  to  an  aggregate  amount  (including 
the  issue  of  June  25)  of  $4,659,820,000.  In  ad- 
dition, a  series  of  certificates  in  anticipation  of  19 19 
income  and  excess  profits  taxes  were  placed  on  con- 
tinuing sale  on  August  20,  and  an  appreciable 
amount  allotted  up  to  October  i,  19 18. 

These  operations  were  attended  by  the  same  strik- 
ing results  noted  in  connection  with  the  certificate 
borrowing   in    anticipation   of    the   earlier   Liberty 

11  "  Monthly  Summary  of  Foreign  Commerce  of  the  United 
States,"  August,  1918,  p.  95. 


THE  TREASURY  93 

Loans.  The  Treasury  balance  rose  with  each  cer- 
tificate issue  and  declined  in  the  interval,  the  crests 
and  hollows  together  constituting  a  manner  of  higher 
plateau  as  compared  with  the  preceding  altitudes. 
Starting  from  above  $1,500,000,000  just  before  the 
resumption  of  certificate  borrowing,  the  Treasury 
balance  remained,  with  bare  exception,  well  above 
$1,400,000,000  through  July  and  rose  above  $1,- 
600,000,000  in  the  second  week  of  August.  There- 
after the  disappointing  response  to  the  issue  of  tax 
anticipation  certificates  offered  on  August  20,  and 
perhaps  even  the  deliberate  correction,  in  accord 
with  suggestion,  of  the  prevailing  policy  of  an  in- 
creasing balance  resulted  in  marked  reduction. 
On  August  31  the  balance  had  dropped  to  $1,082,- 
605,200  and  in  the  seven  weeks  that  succeeded  up  to 
the  flotation  of  the  Fourth  Liberty  Loan  it  did  not 
again  attain  the  July  and  early  August  levels. 

The  flotation  of  the  Fourth  Liberty  Loan  opened 
on  September  28,  191 8,  and  the  subscription  cam- 
paign extended  through  October  19.  The  amount 
of  the  offering  had  been  fixed  at  $6,000,000,000; 
but  there  was  over-subscription  of  almost  $1,000,- 
000,000,  and  the  lists  were  actually  closed  with  $6,- 
989,047,000  allotted  and  the  number  of  subscribers 
"  in  excess  of  21,000,000."  The  terms  of  subscrip- 
tion called  for  an  initial  payment  of  10  per  cent, 
due  at  any  time  up  to  October  19,  and  for  subsequent 
installments  of  20  per  cent,  on  November  21,  20  per 
cent,  on  December  19,  20  per  cent,  on  January  16, 
and  30  per  cent,  on  January  30,  19 19.  The  actual 
receipts  of  the  Treasury  on  account  of  the  Loan  up 
to  October  31,  19 18,  were  $2,295,109,703,  permit- 


94  WAR  BORROWING 

ting  the  payment  of  outstanding  parts  of  the  cer- 
tificate issue  due  October  24  —  issue  of  June  25, 
1918;  $839,646,500  in  nominal  amount  —  and  still 
leaving  the  Treasury  encumbered  with  an  unwieldy 
balance  of  $1,845,739,992  [October  31,  19 18]. 

In  attempting  to  appraise  the  fiscal,  as  distinct 
from  the  economic  and  social  results  of  certificate 
borrowing,  it  is  important  to  set  forth  the  standards 
by  which  the  effectiveness  of  a  credit  expedient  in 
war  finance  is  to  be  gauged.  There  will  be  little 
difference  of  opinion  among  students  of  finance  or 
financial  administrators  as  to  these  standards. 
The  Treasury  must  obtain  that  part  of  its  revenue 
which  is  to  be  procured  by  borrowing  with  as  little 
delay,  as  slight  risk  and  as  moderate  cost  as  possible. 
Readiness,  certainty  and  economy  are  the  criteria  of 
the  fiscal  serviceableness  of  a  war  borrowing  device. 
It  is  with  reference  to  these  that  our  fiscal  ex- 
perience in  the  use  of  certificates  of  indebtedness 
should  be  examined. 

In  the  matter  of  fiscal  readiness,  certificate  bor- 
rowing has  proved,  as  might  be  expected,  a  highly 
efficient  method.  This  is  true  both  of  authorization 
and  of  administration.  It  has  been  possible  to 
secure  legislative  approval  without  protracted  debate 
or  embarrassing  delay,  and  there  has  been  popular 
sanction  in  financial  circles  and  in  public  opinion  of 
the  borrowing  procedure.  How  much  of  this 
assent  represents  intelligent  approval,  how  much 
sheer  faith  cannot  be  determined.  Financial  legisla- 
tion in  the  United  States  has  rarely  been  preceded  or 
even  accompanied  by  a  campaign  of  education  —  in 


THE  TREASURY  95 

war  financing,  least  of  all.  In  the  matter  of  cer- 
tificate borrowing  the  obvious  plausibility  of  the 
operation,  added  to  the  technical  difficulty  of  trac- 
ing its  ultimate  effects  has  encouraged  popular 
acquiescence.  Certainly  without  the  remotest  ap- 
proach to  suppression  or  concealment,  the  Treasury 
has  been  able  to  efTect  its  end  unhindered  by  popular 
disfavor  or  resistance. 

Not  only  has  it  been  possible  to  secure  prompt  and 
easy  authorization  for  certificate  borrowing,  but  its 
actual  administration  has  probably  involved  less 
initial  efTort  and  smaller  preliminary  cost  on  the 
part  of  the  Treasury  than  any  alternate  procedure 
productive  of  like  amount  would  have  entailed. 
This  is  a  result  of  the  dual  character  of  the  opera- 
tion—  (a)  the  placing  of  the  certificate  issues  and 
(b)  the  flotation  of  the  liquidating  loan.'  It  is  pos- 
sible that  the  combined  cost  in  trouble  and  outlay 
has  been,  if  anything,  more  considerable  than  that  of 
a  direct  bond  issue.  But  of  this  total  only  a  very 
minor  part  has  been  associated  with  the  first  stage 
—  certificate  borrowing  proper.  The  effective  ma- 
chinery of  the  Federal  Reserve  System  has  per- 
mitted economical  allotment  and  remittance.  As 
in  the  case  of  bank  credits  or  demand  notes,  the 
charges  of  administration  if  not  constant  certainly 
have  not  varied  directly  with  the  amount  borrowed. 
Finally  the  mechanism  of  distribution,  once  estab- 
lished and  regularized,  has  been  capable  of  re-use 
and  larger  use  with  increasing  efficiency  and  dimin- 
ishing cost. 

Understanding  by  "  certainty,"  the  capacity  of  a 
borrowing  device  to  supply  the  exchequer,  without 


96  WAR  BORROWING 

risk  or  delay,  with  such  amounts  at  such  times  as  the 
war  budget  requires  —  the  effectiveness  of  certifi- 
cate borrowing  has  been  again  little  short  of  ideal. 
The  huge  maximum  amounts  authorized,  the  always 
present  power  to  re-issue  or  refund  maturing  issues, 
the  mechanism  of  the  Federal  Reserve  Banks  — 
payment  by  credit,  exemption  of  government  de- 
posits from  reserve  requirements,  and  rediscount 
facilities  —  have  virtually  put  it  within  the  reach  of 
the  Treasury  to  obtain  for  itself  any  amount  at  any 
time  that  the  national  defense  may  have  made 
necessary.  This  has  been  true  of  the  vast  sums 
borrowed  at  more  or  less  regular  intervals  by  formal 
certificate  issues,  and  also  of  the  special  advances 
made  on  occasions  to  meet  extraordinary  emergen- 
cies. A  certain  awkwardness  may  have  been  suf- 
fered from  time  to  time  before  the  borrowing  pro- 
cedure had  become  perfected  and  regularized.  But 
with  the  successful  placing  of  the  issues  in  anticipa- 
tion of  the  Second  Liberty  Loan,  these  difficulties 
may  be  said  to  have  been  left  safely  behind.  Since 
then  the  task  of  the  Treasury  in  this  respect  has 
been  little  more  than  to  extend  an  existing  mechan- 
ism to  meet  increasing  requirement. 

War  time  borrowings  should  be  effected  not  only 
readily  and  certainly  —  but  cheaply.  On  its  face 
the  certificate  method  would  seem  to  be  admirably 
adapted  to  economical  borrowing.  The  interest 
rate  on  such  temporary  advances  is  presumably  less 
than  upon  funded  loans,  and  the  readiness  with 
which  funds  can  be  secured  by  certificates  —  both  as 
to  occasion  and  amount  —  should  make  it  possible 


THE  TREASURY  97 

for  the  Treasury  to  adjust  borrowings  to  needs 
with  far  greater  precision  than  in  the  case  of  in- 
frequent bond  issues.  In  neither  of  these  par- 
ticulars were  the  maximum  possibiHties  reahzed. 
Only  in  the  case  of  the  ante-bellum  issue  of  March 
31,  19 1 7,  was  the  interest  rate  —  two  per  cent. — 
notably  less  than  the  presumable  cost  of  funded  bor- 
rowing. With  succeeding  issues  the  differential 
between  the  certificate  rate  and  the  Liberty  Loan 
rate  steadily  declined  until  the  advantage  lay  in  the 
other  direction.  Of  the  four  issues  in  anticipation 
of  the  First  Liberty  Loan,  the  first  two  bore  three 
per  cent,  and  the  remaining  two,  three  and  a  quarter 
per  cent. —  as  compared  with  the  three  and  a  half 
per  cent.  Loan  rate.  Of  the  six  issues  in  anticina- 
tion  of  the  Second  Liberty  Loan,  the  first  three  bore 
three  and  a  half  per  cent,  and  the  remaining  three, 
four  per  cent. —  as  compared  with  the  four  per  cent. 
Loan  rate.  Of  the  six  issues  in  anticipation  of  the 
Third  Liberty  Loan,  the  first  two  bore  four  per  cent, 
and  the  remaining  four,  four  and  a  half  per  cent. — 
as  compared  with  the  four  and  a  quarter  per  cent. 
Loan  rate.  All  seven  issues  in  anticipation  of  the 
Fourth  Liberty  Loan  bore  four  and  a  half  per  cent, 
as  compared  with  the  four  and  a  quarter  per  cent. 
Loan  rate. 

The  conspicuous  economy  of  short-term  borrow- 
ing lies  theoretically  in  the  means  it  offers  of  sup- 
plying the  Treasury  with  the  funds  to  be  raised  by 
credit  at  the  precise  time  and  to  the  exact  amount  de- 
sired —  due  regard  being  had  for  the  maintenance 
of  such  adequate  working  balance  as  prudent  fin- 


98  WAR  BORROWING 

anciering  would  dictate.^^  An  ordinary  long-term 
bond  issue  must  inevitably  be  floated  some  time  in 
advance  of  the  date  at  which  its  proceeds  will  begin 
to  be  needed,  and  the  amount  made  available  and  be- 
come subject  to  interest  charge  will  for  a  consider- 
able time  be  in  excess  of  the  Treasury's  needs.  It 
is  possible  to  attempt  to  reduce  the  cost  and  strain 
of  this  plethora  by  permitting  the  optional  payment 
of  bond  subscriptions  in  several  installments,  and  by 
arranging  for  the  redeposit  of  funds  in  subscribing 
banks  qualified  as  government  depositaries  with 
nominal  interest  return.  But  as  long  as  installment 
payment  is  not  mandatory  there  will  be  heavy  over- 
payment and  payment  in  full,  and  in  such  event  the 
difference  between  the  interest  rate  borne  by  the 
bonds,  and  the  interest  return  upon  the  public  de- 
posits constitutes  a  net  charge. 

On  the  other  hand,  certificate  borrowing  —  the 
machinery  once  perfected  —  should  enable  the 
Treasury  to  delay  recourse  to  credit  until  the  re- 
quirement is  close  at  hand,  and  thereafter  should 
permit  a  precise  adjustment  of  loan  to  need.  The 
distinction  is  much  akin  to  the  advantage  which  a 
business  man  would  enjoy  with  respect  to  the  bank- 
ing accommodations  which  he  requires  were  the 
banking  mechanism  so  secure,  his  personal  credit  so 
indubitable,  the  money  market  so  stable  that  he 
could  entirely  forego  time  loans  and  rely  entirely  on 
demand  borrowing. 

12  "  The  first  rule  laid  down  by  the  science  of  finance  is,  that 
the  demands  of  the  government  for  money  shall  never  exceed 
the  amount  necessary  to  perform  with  economy  those  duties 
imposed  upon  it "  (H.  C.  Adams,  "  Public  Debts,"  New  York, 
1887,  p.  92). 


THE  TREASURY  99 

The  actual  advantage  which  the  Treasury  has  de- 
rived on  this  score  from  certificate  borrowing  has 
been  considerably  less  than  the  maximum  theoretical 
possibility.  This  has  been  in  consequence  of  what 
might  be  described  as  the  policy  —  deliberately 
adopted  or  insensibly  developed  —  of  a  mounting 
Treasury  balance. 

The  "  net  balance  "of  the  Treasury  may  be  re- 
garded as  that  amount  which  a  conservative  finan- 
cial policy  deems  it  necessary  to  keep  on  hand  ready 
for  the  prompt  payment  of  public  charges  and 
advances.  In  ordinary  times  the  balance  is  a  part 
of  the  formal  budgetary  plan  —  not  exposed  to  ex- 
traordinary requisition,  and  subject  to  marked  in- 
crease or  reduction  only  to  the  extent  that  estimated 
revenue  or  expenditure  vary.  It  is  likely  thus,  on 
the  one  hand  to  be  more  stable;  but,  on  the  other 
hand,  if  deranged,  to  be  less  easy  of  restoration  to 
the  accustomed  level. 

In  war  time  these  conditions  are  reversed.  Sub- 
ject not  only  to  a  heavier  continuing  out-go,  but  to 
more  frequent  and  more  irregular  demands,  the 
working  balance  must  by  virtue  of  this  instability 
be  larger.  Opposed  to  this  tendency,  is  the  facility 
afforded  by  certificate  borrowing  for  quick  and  easy 
replenishing  of  a  depleted  balance.  Under  such 
conditions  the  Treasury  might  be  supposed  to  estab- 
lish or  accumulate  a  larger  working  balance  at  the 
outset,  but  thereafter  to  keep  it  within  such  bounds 
or  at  most  to  subject  it  to  a  moderate  progression 
with  increasing  public  expenditure. 

The  actual  course  of  the  Treasury  balance  since 
our  entry  into  the  war  has  been,  contrary  to  the  fore- 


loo  WAR  BORROWING 

going,  in  the  nature  of  periodic  but  progressive  in- 
crease. Reduced  to  graphic  form,  it  represents  the 
appearance  of  a  series  of  irregular  mounting 
plateaus  —  the  high  point  of  each  of  which  has  been 
less  than  the  low  point  of  the  one  next  succeeding. 
The  stages  have  corresponded  with  the  four  cycles 
of  our  financing  —  the  central  incident  of  each  of 
which,  it  will  be  remembered,  has  been  a  loan  flota- 
tion. As  long  as  payment  in  full  or  over-payment 
of  installments  of  bond  subscriptions  is  permitted 
a  swollen  balance  is  perhaps  inevitable  during  and 
immediately  after  the  period  of  flotation.  The  op- 
portunity for  close  adjustment  of  borrowings  to  re- 
quirements presents  itself  during  the  first  stage  in 
the  cycle  —  the  period  of  certificate  borrowing. 
But  even  here  the  phenomenon  of  a  mounting  bal- 
ance in  our  war  financing  has  been  pronounced. 
From  April  25  to  June  8,  19 17  —  the  first  period  of 
certificate  borrowing  —  the  average  daily  balance 
was  $179,579,613  with  $135,099,128  on  April  25, 
as  the  low  (omitting  May  5-9)  and  $263,888,100  on 
May  12  as  the  high  point.  From  August  9  to 
October  24,  19 17  —  the  second  period  of  certificate 
borrowing  —  the  average  daily  balance  was  $453,- 
748,384,  with  $285,283,572  on  October  17,  as  the 
low  and  $656,349,914  on  October  18  as  the  high 
point.  From  January  3  to  April  22,  1918  —  the 
third  period  of  certificate  borrowing  —  the  average 
daily  balance  was  $926,391,004,  with  $653,449,458 
on  January  15  as  the  low  and  $1,196,811,694  on 
March  5,  1918,  as  the  high  point.  From  June  25  to 
August  31,  19 18,  the  fourth  period  of  certificate 
borrowing  up  to  the  date  at  which  the  policy  of  the 


THE  TREASURY  loi 

Treasury  as  to  its  working  balance  may  be  regarded 
as  having  undergone  modification  —  the  average 
daily  balance  was  $1,487,189,694  with  $1,082,605,- 
200  on  August  31  as  the  low  and  $1,916,932,863  on 
June  26  as  the  high  point. 

Even  were  it  normal  for  the  balance  to  increase 
proportionately  with  growth  in  expenditure  —  an 
assumption  that  is  under  existing  conditions 
obviously  unwarranted  —  the  increase  in  the  bal- 
ance far  outran  the  increase  in  disbursements  and  in 
loans  to  the  Allies.  This  will  appear  in  the  follow- 
ing table : 

Average  daily  or- 
dinary disburse- 
Average  daily    merits  and  ad- 
net  balance     vances  to  Allies 
I     (Apr.   25-June  8,    1917)        $179,579,613      $19,211,146 
II     (Aug.   9-Oct.   24,    191 7)  453,748,384        32,294,322 

III  (Jan.  3-Apr.  22,   1918)  926,391,004        43,784,033 

IV  (June  25-Aug.   31,   1918)     1,487,189,694        65,044,025 
Increase  from  I  to  II.  .. .         152.7%  68.0% 
Increase  from  II  to  III.  .         104.1%  35-5% 
Increase  from  III  to  IV.           60.5%                 48.5% 

The  purpose  of  the  Treasury  in  increasing  its 
working  balance  in  this  manner  by  short-term  bor- 
rowings is  not  clear.  The  situation  was  at  no  time 
out  of  ready  and  complete  control.  By  limiting 
overpayments  or  payments  in  full  and  requiring  in- 
stallment quotas  in  settlement  for  Loan  subscrip- 
tions, by  insisting  upon  the  tender  of  certificates  in 
such  settlements  and  enforcing  restrictions  upon 
the  use  of  payment  by  credit,  by  applying  the  Treas- 
ury surplus  to  the  redemption  before  maturity  of 
corresponding  amounts  of  outstanding  certificates 
and  by  reducing  the  volume  and  lengthening  the  in- 


102  WAR  BORROWING 

terval  of  new  certificate  issues,  the  Treasury  might 
at  any  and  all  times  have  prevented  or  at  least 
quickly  corrected  an  over- full  balance.  We  may 
assume  a  certain  reluctance  on  the  part  of  depositary 
banks  to  suffer  a  net  reduction  of  government  de- 
posits, when  in  the  course  of  public  expenditure  such 
deposits  were  drawn  upon.  But  with  the  redis- 
count facilities  of  the  Federal  Reserve  System  mak- 
ing it  possible  for  the  depositary  banks  to  increase 
their  available  funds  under  such  circumstances  with 
little  effort  and  at  moderate  cost,  it  seems  unlikely 
that  the  Treasury  would  have  given  consideration  to 
pressure  from  this  quarter  whether  presented  in  the 
interest  of  monetary  ease  or  of  some  related  reason. 
Until  such  time,  however,  as  the  purpose  of  the 
Treasury  shall  have  been  fully  set  forth,  it  seems 
idle  to  speculate  as  to  motive.  The  essential  fact  is 
that  to  the  extent  that  the  working  balance  was  built 
up  or  maintained  at  a  higher  level  than  safe  financ- 
ing necessitated,  the  maximum  economy  of  certifi- 
cate borrowing  was  unrealized. 

There  remain  to  be  considered  the  advantages  of 
certificate  borrowing  as  a  continuing  mode  of  war 
financing.  Over  and  above  its  effectiveness  or 
otherwise  in  meeting  immediate  fiscal  necessities,  in 
how  far  may  a  policy  of  anticipatory  borrowing  be 
regarded  as  rendering  easier  or  more  difficult  the 
prospective  financial  requirement?  Having  to  do 
with  a  war  of  highly  uncertain  duration  and  of 
rapidly  progressive  cost,  it  is  quite  conceivable  that 
a  present  fiscal  advantage  may  be  gained  only  at  ex- 
cessive cost  with  respect  to  future  needs. 

Theoretical  analysis  suggests  that  there  are  two 


THE  TREASURY  103 

dangers  to  be  here  apprehended.  The  first  has  to 
do  with  the  psychological  disadvantage  of  being 
obliged  to  borrow  to  pay  off  an  already  contracted 
debt  rather  than  to  provide  additional  available 
funds.  The  direct  success  of  certificate  financing 
depends  entirely  upon  the  certainty  with  which  at 
appropriate  intervals  long-term  loans,  into  which  the 
certificates  may  be  funded  or  out  of  the  proceeds  of 
which  they  may  be  redeemed,  will  be  absorbed  by 
pubhc  subscription.  Patriotic  ardor  rather  than 
economic  calculation  determines  the  success  of  such 
flotations  and  the  knowledge  that  the  operation,  in- 
volving as  it  does  a  considerable  measure  of  econ- 
omy and  self-denial,  is  necessary  to  extinguish 
short-term  indebtedness  rather  than  to  put  the 
Treasury  in  funds  for  further  imperative  expendi- 
ture, is  likely  to  exert  a  chilling  effect  upon  the  public 
mind. 

In  actual  experience,  it  is  doubtful  whether  this 
deterrent  has  up  to  the  present  time  figured.  There 
has  been  in  the  case  of  each  Liberty  Loan  a  sub- 
stantial, although  a  declining  margin  between  the 
volume  of  anticipatory  borrowing  and  the  principal 
of  the  funded  loan.  More  remarkable,  there  has 
been  a  singular  non-comprehension  on  the  part  of  the 
public  that  the  anticipated  proceeds  of  each  Loan 
have  in  fact  been  largely  expended  prior  to  the 
flotation,  and  the  loan  campaigns  have  been  marked 
by  no  general  attempt  to  spread  enlightenment  on 
this  score.  With  respect  to  the  future,  neither  of 
these  two  conditions  is  likely  to  obtain  to  the  same 
extent.  The  volume  of  anticipatory  certificate  in- 
debtedness promises  to  approximate  more  closely 


I04  WAR  BORROWING 

to  the  principal  of  the  funded  loan,  and  there  is  a 
popular  growing  appreciation  of  the  fact  that  under 
the  prevailing  system  a  Liberty  Loan  is  actually 
spent  before  it  is  subscribed.  Fiscally  valid  though 
such  procedure  may  be,  it  can  hardly  be  doubted  that 
the  reaction  upon  the  public  mind  will  be  to  some 
extent  unfavorable. 

A  second  danger  to  which  any  sound  fiscal  pro- 
vision for  the  immediate  future  may  be  conceivably 
exposed  by  certificate  borrowing  is  closely  connected 
with  the  inherent  defect  of  the  short-term  loan  as 
an  habitual  device  in  war  financing  —  descent  to 
renewal  and  refunding.  As  long  as  the  anticipa- 
tory issues  are  completely  funded  into  or  redeemed 
out  of  the  succeeding  Liberty  Loan,  the  way  is  left 
clear  for  a  renewal  of  the  process.  If  however  the 
popular  absorption  of  the  Loan  falls  short  of  the 
volume  of  outstanding  certificates  of  indebtedness, 
the  Treasury  is  compelled  either  to  renew  or  refund 
maturing  certificate  issues  or  to  load  up  the  banks 
with  long-term  obligations  or  to  have  earlier  re- 
course to  another  Loan.  Similarly,  if  the  proceeds 
of  the  Loan  be  applied  to  current  expenditures 
rather  than  to  the  redemption  of  certificates  the  an- 
ticipatory issues  partake  of  the  nature  of  inde- 
pendent short-term  loans  that  must  upon  maturity 
either  be  renewed,,  or  be  liquidated  from,  other 
sources. 

In  both  of  these  respects  the  actual  experience  of 
the  Treasury,  while  up  to  the  present  exempt,  has  at 
least  shown  tendencies  that  may  not  be  safely 
neglected.  In  the  Fourth  Liberty  Loan  not  only 
was  the  ratio  of  outstanding  certificates  to  the  nom- 


THE  TREASURY  105 

inal  principal  of  the  Loan  greater  than  in  any  of  the 
preceding  cycles,  but  in  so  far  as  available  data 
make  any  intelligent  opinion  possible  —  the  ratio  of 
such  anticipatory  borrowing  to  the  investment  or 
"  savings "  absorption  of  the  loan  was  notably 
greater.  Moreover  the  later  maturity  of  the  final 
certificate  issues  (extending  up  to  January  30, 
1919),  combined  with  the  heavy  overpayment  of  the 
first  installment  of  the  loan  whereby  only  some  14 
per  cent,  of  the  Loan  was  left  unpaid,  and  the  rela- 
tively minor  use  of  certificates  in  connection  there- 
with —  make  it  reasonably  certain  that  such  issues 
must  be  either  refunded  or  liquidated  from  out  of 
the  proceeds  of  subsequent  short-term  borrowing. ^^ 
Confronted  as  the  Treasury  is  with  heavy  deficiency 
appropriations  and  with  additional  tax  revenue  still 
in  process  of  enactment  and  destined  to  become  only 
slowly  available,  certificate  financing  faces  not  only 
the  inevitable  disadvantage  of  borrowing  to  pay 
debts  but  the  graver  necessity  of  renewal  and  exten- 
sion of  existing  short-term  loans-  in  face  of  the  need 
of  additional  borrowing  —  unless  indeed  further 
recourse  is  to  be  had  in  one  form  or  another  to  bank 
borrowing  or  to  the  projection  of  a  succeeding  Loan 
earlier  than  has  heretofore  been  deemed  prudent. 
An   unexpected    termination   of   the   war   has,   of 

13  The  issue  of  the  second  series  of  1919  tax  anticipation 
certificates  dated  November  7  (Series  i)  closed  on  November 
27,  with  total  subscriptions  to  the  amount  of  $794,172,500.  On 
November  8,  1918,  the  Treasury  gave  notice  of  the  redemption 
at  par  and  accrued  interest  on  November  21,  1918,  of  the 
$575,706,500  certificate  issue  of  August  6,  1918,  maturing  De- 
cember 5,  1918  (Commercial  and  Financial  Chronicle,  Novem- 
ber 9,  1918,  p.  1784)  ;  December  7,  1918,  p.  2138). 


io6  WAR  BORROWING 

course,  divested  the  situation  of  some  of  its  diffi- 
culty. But  conservative  financial  policy  will  hesi- 
tate to  place  undue  reliance  upon  the  genius  of  the 
Republic. 


THE  MONEY  MARKET 


IV 

THE  MONEY  MARKET 

The  prime  purpose  of  a  fiscal  expedient  in^  time 
of  war  is  to  supply  the  Treasury  with  funds  suf- 
ficient to  meet  the  extraordinary  requirements  of 
national  defense.  The  further  effectiveness  of  a 
war  revenue  measure  is  gauged  by  its  success  in  sat- 
isfying the  Treasury's  needs  with  least  disturbance 
of  the  business  activity  of  the  nation  and  with  least 
injustice  to  social  classes.  In  matters  of  taxation 
these  indirect  but  none  the  less  vital  tests  are  the  re- 
sultant pace  of  industry  and  the  final  incidence  of 
tax  burdens.  With  respect  to  public  borrowing,  the 
criteria  are  the  course  of  the  money  market  and  the 
movement  of  prices.  The  course  of  the  money 
market  is  likely  to  register  the  strain  and  dislocation 
put  upon  trade  and  industry.  The  movement  of 
prices  will  disclose  the  presence  and  extent  of  mone- 
tary inflation,  with  its  accompaniments  of  social  in- 
justice and  economic  hardship. 

It  becomes  important,  accordingly,  to  examine  in 
how  far  the  use  of  certificates  of  indebtedness  in  our 
war  financing  has  affected  the  money  market  and 
the  price  level.  In  the  present  chapter  examination 
will  be  made  of  the  relation  of  our  short-term  bor- 
rowing to  the  supply  and  cost  of  business  capital ;  in 
the  following  chapter  the  effect  of  certificates  of  in- 

109 


no  WAR  BORROWING 

debtedness  upon  the  volume  of  credit  and  the  level 
of  prices  will  be  studied. 

The  avoidance  of  monetary  dislocation  has  been 
an  avowed  purpose  of  the  Treasury  in  the  use  of 
certificates  of  indebtedness  in  conjunction  with  its 
borrowing  policy.  This  intention  has  been  reiter- 
ated to  the  degree,  it  might  be  almost  objected,  of 
under-emphasis  upon  the  real  end  which  the  certifi- 
cate issues  were  designed  to  serve  —  the  mainte- 
nance of  the  Treasury  balance. 

At  the  outset  of  our  war  financing  there  was  no 
such  expressed  purpose.  The  report  of  the  Ways 
and  Means  Committee  of  March  3,  19 17,  ac- 
companying the  war  revenue  bill  recommended  an 
increase  in  the  authorized  volume  of  certificates  of 
indebtedness  on  the  score  that  "  under  the  present 
system  of  taxation  a  considerable  portion  of  the  re- 
ceipts are  not  due  and  payable  until  the  last  month 
of  each  fiscal  year."  Similarly,  the  ante-bellum 
issue  of  $50,000,000  certificates  offered  on  March 
27,  as  well  as  the  contemplated  additional  issue  of 
like  amount  to  be  emitted  before  the  end  of  the  fiscal 
year,  were  described  as  "  in  anticipation  of  the  pay- 
ment of  the  corporation  and  individual  income  taxes 
due  in  June,  1917  " — with  no  intimation  of  other 
service. 

The  further  purpose  which  certificate  borrow- 
ing was  designed  to  serve  might  be  regarded  as  fore- 
shadowed in  the  First  Liberty  Loan  act  in  the  in- 
crease in  the  authorized  volume  of  certificates  of  in- 
debtedness from  $300,000,000  to  $2,000,000,000  — 
a  sum  obviously  in  excess  of  what  was  needed  to 


THE  MONEY  MARKET  iii 

keep  the  Treasury  in  funds  until  the  administrative 
delays  reasonably  incident  to  a  loan  flotation  were 
overcome.  In  an  accompanying  statement  of  the 
Secretary  of  the  Treasury  of  April  20,  19 17,  this 
purpose  was  first  clearly  set  forth  in  a  form  con- 
veniently described  as  the  money  market  argument :  ^ 

"  The  Secretary  appreciates  the  desirability  of  avoiding 
any  derangement  of  the  money  market,  and  in  the  financial 
operations  in  which  the  Government  is  about  to  engage  it 
will  be  his  purpose  to  adjust  receipts  and  disbursements  in 
such  a  way  that  as  far  as  possible  money  paid  in  will  be 
promptly  returned  to  the  market.  The  contemplated  sale 
of  Treasury  certificates  is  in  line  with  this  policy.  Should 
the  banks  during  the  next  few  weeks  absorb  several  hun- 
dred million  dollars  of  these  certificates,  the  proceeds  being 
paid  out  in  the  course  of  business,  the  banks  will  possess 
ready  means  with  which  to  meet  withdrawals  made  later 
by  depositors  in  paying  for  bond  subscriptions.  The  re- 
sult of  this  method  will  be  a  gradual  anticipation  of  pay- 
ment on  account  of  bonds  with  a  steady  and  continuous 
return  to  the  banks  of  the  moneys  paid  in." 

The  same  consideration  appeared  in  the  assurance 
given  at  this  time  by  the  Federal  Reserve  Board  to 
the  member  banks :  ^ 

"  The  Federal  Reserve  Banks  may  be  counted  upon  by 
offering  liberal  terms  of  rediscounting  to  do  their  utmost 
in  counteracting  any  effect  of  temporary  dislocation  of 
banking  funds." 

The  plan  recommended  by  the  Treasury  on  May 
16,  191 7,  for  the  payment  of  subscriptions  to  the 
First  Liberty  Loan  by  the  use  of  credit  and  the  ten- 
der of  certificates  of  indebtedness  was  designed  "  to 

1  Federal  Reserve  Bulletin,  May,  1917,  p.  342. 
^Federal  Reserve  Bulletin,  May,  1917,  p.  342. 


112  WAR  BORROWING 

avoid,  even  temporarily,  a  derangement  of  the 
money  situation,"  and  the  "  accumulation  of  great 
cash  payments  within  a  few  days."  As  to  the  de- 
sirabiHty  of  this  procedure,  whereby  subscribing 
banks  might  "  gradually  and  without  disturbing  the 
money  market,  acquire  exchange  payable  in  the  place 
where  subscriptions  are  to  be  paid  "  so  that  "  the 
bank  resources  of  the  United  States  as  a  whole  will 
not  be  diminished,  and  the  operation  involve  only  a 
shifting  of  credits,"  the  most  impressive  language 
was  used :  ^ 

"  The  Secretary  feels  that  he  cannot  too  strongly  urge 
upon  the  banks  and  trust  companies  of  the  country  that  it 
is  their  patriotic  duty  to  prepare  for  the  payments  which 
they  will  have  to  make  on  account  of  the  Liberty  Loan, 
first,  by  the  acquisition  of  certificates  of  indebtedness,  and 
second,  by  qualifying  under  the  act  so  as  to  be  in  a  posi- 
tion to  make  payment  by  credit  if  the  subscriptions  by  and 
through  them  are  likely  to  amount  to  $100,000  or  more 
bonds." 

Early  in  August,  19 17,  the  Treasury  resumed  the 
issue  of  certificates  —  this  time  in  anticipation  of 
the  Second  Liberty  Loan.  The  Treasury's  an- 
nouncement was  merely  to  the  effect  that  the  offer- 
ings were  resumed  "  in  order  to  provide  funds  to 
meet  the  requirements  of  the  United  States  for  its 
own  expenditures  and  for  its  advances  to  foreign 
Governments  at  war  with  the  German  Govern- 
ment." In  the  succeeding  fortnight,  with  the  in- 
corporation of  two  new  elements  in  the  Treasury's 
borrowing   policy  —  the   maintenance   of   a   larger 

3  Treasury  Department  Circulars  No.  79  of  May  16,  1917,  and 
No.  81  of  May  29,  1917. 


THE  MONEY  MARKET  113 

Treasury  balance  and  the  extension  of  payment 
by  credit  from  bond  to  certificate  purchases  —  the 
money  market  argument  came  into  greater  prom- 
inence as  a  necessary  reinforcement  of  the  fiscal  pur- 
pose. In  conjunction  with  the  certificate  issue  of 
August  28,  19 1 7,  and  the  proposed  redeposit  of  pro- 
ceeds with  subscribing  banks  —  the  Treasury  an- 
nounced that  "  it  is  expected  that  certificates  of  in- 
debtedness will  be  issued  from  time  to  time  some- 
what in  advance  of  the  immediate  requirements  of 
the  United  States,"  and  added  an  explicit  statement 
in  explanation :  ■* 

"  The  primary  object  of  this  is  to  avoid  the  financial 
stress  which  would  result  from  the  concentration  of  the 
payments  for  a  great  bond  issue  upon  a  single  day  (which 
cannot  be  avoided  wholly  by  provision  for  payrnent  by 
installments  as  a  great  proportion  of  subscribers  prefer 
to  make  payment  in  full  on  one  day  as  a  matter  of  con- 
venience). Those  who  acquire  certificates  of  indebted- 
ness, in  advance  of  the  bond  issue,  gradually,  without  dis- 
turbing the  money  position,  purchase  exchange  payable 
where  the  bond  subscriptions  must  be  paid  (that  is,  at  the 
Federal  Reserve  Banks),  in  advance  of  the  date  when  the 
payment  is  to  be  made,  and  meanwhile  secure  a  substantial 
return  upon  their  money." 

This  statement  as  to  "  the  primary  object  "  re- 
appeared in  the  announcement  of  the  certificate  issue 
of  September  17,  1917,  and  in  substance  repeatedly 
thereafter,  and  may  be  regarded  as  fairly  represent- 
ative of  the  Treasury's  subsequent  emphasis  upon 
the  stabilizing  effect  of  certificate  borrowing.^  The 
same  note  was  struck  in  connection  with  the  cer- 

*  Federal  Reserve  Bulletin,  September,  1917,  p.  664. 
s  Federal  Reserve  Bulletin,  November,  1917,  p.  830. 


114  WAR  BORROWING 

tificate  issues  in  anticipation  of  the  Third  and 
Fourth  Liberty  Loans  and  of  the  191 8  and  19 19  in- 
come and  excess  profits  taxes,  and  it  has  been  echoed 
and  re-echoed  in  financial  journals  and  banking  pub- 
lications. 

The  need  for  some  equilibrating  device  in  the 
money  market  during  the  period  of  our  war  financ- 
ing has  obviously  been  great.  The  four  Liberty 
Loans,  the  war  taxes  on  incomes  and  excess  profits 
and  the  enormous  expansion  of  quasi-governmental 
industries  have  involved  such  huge  and  such  abrupt 
requisitions  upon  the  available  capital  and  credit  of 
the  nation,  that  continuing  strain  and  recurrent  jar 
—  verging  upon  dislocation  and  convulsion  — 
would  seem  to  have  been  inevitable. 

And  yet  as  indicated  by  the  general  experience  of 
the  business  community  and  as  evidenced  by  the 
actual  course  of  the  money  market  there  has  been 
neither  business  derangement  nor  monetary  disloca- 
tion. Stringency  has  prevailed;  but  it  has  been 
largely  of  a  kind  and  to  a  degree  at  first  sanctioned 
and  subsequently  imposed  by  administrative  policy 
with  a  view  to  the  conservation  of  credit,  the 
restraint  of  non-essential  production,  and  the  preven- 
tion of  banking  over-expansion. 

The  relative  number  of  business  failures  in  the 
country  is  at  all  times  an  insufficient  index  of  mone- 
tary conditions,  and  this  inadequacy  is  very  much 
more  pronounced  when  normal  business  tendencies 
have  been  deflected  and  controlled  in  many  direc- 
tions by  the  exigencies  of  war-time.  But  the  facts 
as  to  a  lower  business  mortality  rate  during  the  per- 


THE  MONEY  MARKET  115 

iod  of  our  war  borrowing  are  so  striking  that  they 
may  not  be  entirely  neglected. 

The  number  of  business  failures  reported  in  19 17 
was  20.7  per  cent,  less  than  in  1916,  31  per  cent,  less 
than  in  1915,  2.2  per  cent,  less  than  in  1914,  8 
per  cent,  less  than  in  19 13,  5  per  cent,  less  than  in 
1912,  and  but  3  per  cent,  greater  than  in  191 1. 
The  liabilities  of  those  failing  were  5.4  per  cent,  less 
than  those  in  191 6,  41  per  cent,  less  than  those  in 
191 5»  53  pc^  cent,  less  than  those  in  19 14,  43  per 
cent,  less  than  those  in  19 13.  Not  only  were  the 
failures  the  lowest  since  191 1  but  the  liabilities  were 
the  smallest  since  1909,  this  despite  the  fact  that  the 
number  of  those  in  business  in  the  country  had  in- 
creased some  18  per  cent.  The  percentages  of 
those  failing  to  those  in  business  was  .71  per  cent,  in 
1917,  as  against  .92  per  cent,  in  1916,  1.07  per  cent, 
in  19 1 5,  and  .95  per  cent,  in  1914.  The  percentage 
of  business  mortality  in  191 7  was  actually  the  lowest 
—  with  the  exception  of  the  years  1906  and  1907  — 
in  the  past  thirty-seven  years.^  This  lessened  mor- 
tality has  since  continued.  The  failures  reported 
for  the  first  nine  months  of  19 18  showed  a  decrease 
of  24.8  per  cent,  from  the  like  period  of  19 17  and 
were  only  about  one-half  of  what  they  were  in  the 
Hke  period  of  1915 — "a  very  favorable  year  up  to 
the  time  of  the  outbreak  of  the  first  Balkan  war  in 
the  autumn."  Liabilities  were  the  smallest  re- 
corded in  any  year  since  1906,  being  15  per  cent, 
smaller  than  the  year  before  and  less  than  half  those 
of  the  years  19 14  and  1915.^ 

*•  Bradstreet's,  January  5,  1918. 
"^  Bradstreet's,  October  5,  1918. 


ii6  WAR  BORROWING 

It  would  be  unsafe  to  draw  any  outright  con- 
clusion as  to  prevailing  monetary  conditions  from 
this  exhibit.  At  least  this  much  may  however  be 
ventured :  the  business  community  has  during  this 
period  suffered  no  monetary  convulsion  with  its  in- 
evitable accompaniment  of  widespread  disaster  and 
ruin. 

More  specific  evidence  that  although  strained  the 
business  world  has  been  neither  dislocated  nor  con- 
vulsed is  afforded  by  the  actual  course  of  the  money 
market  during  the  period  of  our  war  borrowing. 
The  prevailing  rates  of  call  and  time  money  in  New 
York  City  in  the  period  under  review  have  been  as 
follows :  ^ 

Actual  Rates  of  Interest 

(Percent.) 

Call  Loans  at  New  York  Stock  Exchange 

'08    'eg    '10    '11     '12    '13    '14    '15    '16    '17  '18 

Jan 4.75  1.81  4.72  3.18  2.43  3.23  2.38  2.13  1.88  2.05  4-10 

Feb 1.81  2.25  2.78  2.28  2.28  3.31  1.78  1.97  1.88  2.41  4.99 

Mar 1.85  1.85  2.88  2.28  2.42  4.19  1.91   1.93  1-91  3-^3  5.i9 

Apr 1.72  1.94  3.28  2.30  3.00  3.43  1.83  2.09  2.09  3-^3  4.08 

May    1.66  1.84  3.63  2.31  2.75  2.7s  1.78  1.94  2.28  3.13  5.16 

June   1.52  1.87  2.77  2.40  2.75  2.25  1.84  1.85  2.97  3.63  5.00 

July    1.22  2.06  2.41  2.36  2.88  2.25  2.65  1.88  3.13  3.97  5.63 

Aug 1.06  2.17  1.55  2.31  2.84  2.25  6.2s  1.78  2.35  3.63  5.88 

Sept 1.35  2.69  2.00  2.28  2.63  2.90  6.00  1.78  2.78  3.38  5.S8 

Oct 1.44  4-31  3-13  2.33  5.33  3.69  6.00  1.81  2.60  3.38  6.00 

Nov 1.7s  4.65  3-23  2.72  6.38  3.75  5.41   1.88  3.13  3-50  S.58 

Dec 2.90  S.03  3.38  4.03  6.50  4-63  3-38  1.94  4-44  3-9^  S-OO 

Average     .  .1.97  2.70  2.97  2.57  3.52  3.22  3.43  1.92  2.59  2.40  5.29 

8  The  figures  for  1908-1915  are  Professor  W.  C.  Mitchell's 
("Business  Cycles,"  1913,  p.  155;  Journal  of  Political  Econ- 
omy, June,  1913,  p.  512;  ibid.,  February,  1916,  p.  146.)  For 
1916-18  the  data  have  been  computed  by  the  writer  according 
to  Professor  Mitchell's  method. 


THE  MONEY  MARKET 


117 


Jan. 

Feb. 

Mar. 

Apr. 

May 

June 

July 

Aug. 

Sept. 

Oct. 

Nov. 

Dec. 

Average 


Commercial  Paper 

'08    '09    '10    '11     '12 

.  .6.59  3.68  4.75  3.98  3.90 

.  .5.06  3.54  4.44  4.09  3.75 

.  .5.63  3.50  4.50  3.88  4.19 

•  •4.38  3.50  4-75  3-66  4.15 
.  .3.94  3.44  4.75  3.63  4-19 
.  .3.69  3.25  4.81  3.69  4.00 

•  -375  3-38  5-38  378  4.53 
.  .3.01  4.04  5.43  4.19  5.00 
.  .3.89  4-25  5-53  4-54  5-56 
.  .4.10  5.03  5-56  4.35  5-93 
.  .4.04  5.09  5.50  3.91  5.72 
■  •3-85  5-09  4-66  4.63  6.00 
.  .4.42  3.86  5.01  4.02  4.74 


60-90  days 
'13     '14    '15 

4-93  4-53  3.84 
4.91  3.84  3.75 
575  3-88  3.38 
5.53  373  3-66 
5-36  3.88  3.72 
5.88  3.84  3.65 
6.06  4.40  3.25 
6.00  6.34  3.53 
5.78  6.70  3.25 
5.69  6.44  3.22 
5.56  5.50  2.98 
5.68  4.35  3.13 
5-59  479  3-45 


'16    '17     'li 


3-13  3-55 
3-13  4.13 
3-13  4.13 
3-13  4-28 
3.13  4.83 
3.63  5.50 
3-97  5 
3-63  475 
3.38  4.82 
3-38  5.19 
3.50  5-38 
3-91  5-44 
3.55  473 


5.58 
5.69 
5.88 
5-90 
5.88 
5-88 

5.94 
6.00 
6.00 
6.00 
5-98 
5.81 
5.88 


Commercial  Paper: 
'08    '09    '10    '11     '12 

Jan 6.70  4.40  5.28  4.61  4.63 

Feb 5.80  4.22  5.16  472  4-50 

Mar 4.28  5'.23  4.59  4.91 

Apr 5.25  4.25  5.59  4.28  5.00 

May    4.25  4.29  5.45  4.33  5.00 

June   4.64  4.21  5.50  4.63  4.50 

July    4.58  4.15  6.16  4.79  5.08 

Aug 4.43  4.56  6.30  4.86  5-69 

Sept 4.75  4.75  6.31  5.33  6.13 

Oct 6.21  4.93  6.50 

Nov 5.98  6.15  4.72  6.50 

Dec 4.69  5.59  5.28  5.25  6.50 

Average    .  .4.95  4-67  572  4.71  5.41 


4-6  Months 

'13  '14    '15     '16 

5.50  5.09  4.38  3.50 

5.50  4.38  4.38  3.50 

6.25  4.44  3.93  3.50 

6.20  4.28  4.25  3.50 

5.88  4.50  4-34  3-50 

6.38  4.50  4.33  4 

6.66  5.03  3-8i  3-88 

6.63  7.00  4.01  4.13 

6.45  7.60  3.88  4 

6.38  7-56  3.91  3-95 

6.25  6.44  3.45  3.94 

6.30  4-85  3-50  4-19 

6.19  5-47  4-OI  3-8o 


'17     '18 

398  573 
4-47  575 
4.50  6.00 
4.63  6.08 
5.18  6.13 
5-03  6.04 
5.15  6.10 
5.22  6.31 
5.44  6.00 
5.63  6.G0 
5.69  5.98 

575  6.00 

576  6.01 


Summary 
'08    '09    '10    '11     '12    '13    '14    'is    '16    '17    '18 
Call    loans.  1.97  2.70  2.97  2.57  3.52  3.22  3.43  1.92  2.59  2.40  5.29 
6o-<)odays 

paper    .  .  .4.42  3.86  5.01  4.02  4.74  5.59  4.79  3.45  3.35  4.73  5.88 
4-6  months 
paper    . .  .4.95  4,67  5.72  4.71  5.41  6.19  5.47  4.01  3.80  5.06  6.01 

In  studying  the  above  exhibit,  it  is  necessary  to 
remember  that  for  the  largest  part  of  our  war  bor- 


ii8  WAR  BORROWING 

rowing  period  the  normal  tendencies  of  the  money 
market  were  influenced  and,  within  the  possibilities 
of  the  situation,  were  dominated  by  the  deliberate 
control  of  the  New  York  City  money  market.  On 
September  5,  1917,  the  Liberty  Loan  General  Com- 
mittee of  the  New  York  District,  acting  at  the  in- 
stance of  and  in  cooperation  with  the  Federal  Re- 
serve Bank  of  New  York,  appointed  a  "  sub-com- 
mittee on  money  "  for  the  purpose  of  "  securing  the 
most  complete  cooperation  with  the  Government  in 
its  financial  program  by  all  the  financial  interests  of 
the  city."  ^ 

In  the  succeeding  months  under  the  chairman- 
ship of  the  governor  of  the  Federal  Reserve  Bank  of 
New  York  and  with  a  membership  representative  of 
the  most  powerful  financial  institutions  of  the  city, 
this  "  money  committee  "  undertook  and  carried  out 
with  increasing  effectiveness  what  amounted  to  a 
deliberate  rationing  of  the  money  market.  Upon 
the  basis  of  daily  information  gathered  by  the  Fed- 
eral Reserve  Bank,  certain  of  the  larger  banks  and 
trust  companies,  without  formal  action  being  taken 
and  with  each  institution  acting  on  its  individual  ac- 
count in  the  matter  of  terms  and  collateral,  made 
available  from  time  to  time  adequate  amounts  of 
time  and  call  money  "  for  preventing  any  dearth  of 
funds  and  any  friction  in  the  monetary  mechanism." 
While  steps  were  thus  taken  to  prevent  money  rates 
from  advancing  to  extreme  figures,  very  pronounced 
measures  were  adopted  by  propaganda  ^^  and  out- 

9  "  The  Financial  Review :  Annual  for  1918,"  p.  x,  i ;  Fed- 
eral Reserve  Bulletin,  October,  1918,  p.  935. 

^°  See  resolutions  adopted  by  the  board  of  directors  of  the 


THE  MONEY  MARKET  119 

right  limitation  to  restrict  borrowing  and  to  curtail 
loans  and  credits.  These  may  be  said  to  have  cul- 
minated in  September-October,  19 18,  when  the 
money  committee  acting  through  the  governing 
body  of  the  New  York  Stock  Exchange  checked  the 
imminent  tendency  to  expand  the  collateral  loan  ac- 
count by  providing  through  drastic  measures  that 
"  for  the  present  there  should  be  devoted  to  the  se- 
curity market  no  additional  credit  beyond  the  funds 
now  so  used."  ^^ 

The  result  of  such  intervention  was  to  replace  to 
a  large  and  increasing  extent  competitive  by  con- 
ventional conditions  in  the  New  York  money 
market,  with  immediate  sympathetic  reflex  in  all 
capital  markets  of  the  country.  The  degree  to 
which  this  "  pegged  "  condition  was  realized  is  in- 
dicated in  a  well  informed  summary  of  the  money 
market  during  September,  1918:^-  "In  a  word, 
the  money  situation  in  New  York  may  be  said  to 
have  been  stabilized  on  a  six  per  cent,  basis  for  all 
classes  of  loans  for  whatever  business  was  permitted 
to  pass." 

If  with  the  foregoing  facts  in  mind  the  cost  of 
capital  during  the  period  in  which  the  United  States 
has  been  at  war  be  compared  with  the  rates  prevail- 
ing in  the  eight  years  preceding,  it  appears  that  the 
war  rates  have  on  the  whole  been  higher  than  the 
rates    prevailing    in    the    four    years    from    1908 

Federal  Reserve  Bank  of  New  York  regarding  the  conserva- 
tion of  credit,  in  response  to  Governor  Harding's  letter  of  July 
6,  1918  (Federal  Reserz'e  Bulletin,  August,  1918,  pp.  741-2.) 

11  Federal  Reserve  Bulletin,  October,  1918,  p.  935. 

''^'^  Commercial  and  Financial  Chronicle:  Monthly  Review, 
October,  1918,  p.  17' 


I20  WAR  BORROWING 

through  191 1 ;  lower  than  the  rates  in  the  three 
years  from  19 12  through  19 14  and  higher  again 
than  the  rates  of  the  two  years  191 5  and  19 16. 
The  first  of  these  intervals,  1908-1911  was  a  period 
of  business  depression  following  the  crisis  of  1917; 
the  second,  1 912-19 14,  although  of  mixed  quality 
was  on  the  whole  a  period  of  business  revival  and 
financial  activity;  the  third,  191 5-19 16,  was  a  period 
of  war  convulsion  and  feverish  adjustment  to 
wholly  abnormal  conditions. 

The  cost  of  commercial  capital  in  the  United 
States  during  the  period  of  our  actual  belligerency 
has  thus  been  greater  than  in  the  last  preceding 
period  of  business  depression,  less  than  in  the  last 
preceding  period  of  business  activity,  and  greater 
than  in  the  highly  exceptional  years  immediately 
preceding  the  entry  of  the  United  States  into  the 
war. 

Just  as  the  capital  strain  suffered  by  the  business 
world  is  evidenced  by  the  relative  altitude  of  the 
prevailing  money  rates,  so  the  recurrent  jar  and  dis- 
location to  which  the  capital  markets  are  exposed 
appear  in  the  frequency  of  variation  of  such  rates 
from  a  normal  range.  If  the  upper  limit  of  the 
normal  range  of  the  money  rates  in  the  United 
States  be  taken  as  six  per  cent.,  the  presence  of  dis- 
location will  roughly  be  evidenced  by  the  frequency 
with  which  the  prevailing  rates  exceed  this  limit. 
In  the  following  table  are  shown  for  each  year  be- 
ginning with  1908  the  number  of  weeks  within 
which  or  some  part  of  which  the  quoted  rates  of  call 
and  time  money  rose  above  six  per  cent. : 


THE  MONEY  MARKET  121 

'08  '09  '10  '11  '12  '13  '14  '15  '16  '17  '18 

Call    0      o      o      010      5      o      0      5      2        0 

Time  60-90  days.  300004     13      000        o 
Time  4-6  months  3      2     19      0     15    40     17      o      o      o       11 

The  same  general  conditions  as  to  monetary  dis- 
location during  the  period  of  our  belligerency  are 
here  disclosed  as  with  respect  to  monetary  strain. 
The  capital  market  has  been  subject  to  greater  dis- 
turbance than  in  the  stagnant  years  succeeding  the 
panic  of  1907 ;  but  on  the  other  hand  it  has  appar- 
ently suffered  less  jar  than  in  the  more  normal  years 
that  followed  up  to  the  outbreak  of  the  war,  a  con- 
siderable part  of  this  stability  in  more  recent  months 
being  referable  to  the  deliberate  control  of  the  loan 
market. 

It  remains  to  inquire  in  how  far  this  absence  of 
extraordinary  strain  and  dislocation  in  the  money 
market  is  specifically  due  to  the  use  of  certificates  of 
indebtedness ;  in  how  far  it  is  imputable  to  the  credit 
mechanism  developed  by  the  Treasury,  in  conjunc- 
tion with  the  Federal  Reserve  System, —  a  credit 
mechanism  utilized  indeed  in  certificate  borrowing 
but  neither  peculiar  to  it  nor  any  less  available  in 
connection  with  other  borrowing  methods. 

In  making  hypothetical  comparison  between  the 
two  essential  modes  of  war  borrowing  —  exempli- 
fied in  a  direct  long-term  loan  on  the  one  hand,  and  a 
series  of  short-term  certificate  issues  fundable  into 
or  payable  out  of  the  proceeds  of  a  long-term  loan 
on  the  other  hand, —  it  should  be  assumed  that  pay- 
ment is  made  whether  for  bonds  or  for  certificates 
in  cash  or  current  exchange,  that  the  banks  of  the 


122  WAR  BORROWING 

country  are  in  each  case  under  like  state  as  to  loan- 
able funds  (the  relation  of  reserves  to  deposits), 
and  that  the  absorbing  capacity  of  ultimate  investors 
is  identical  in  the  two  instances.  Under  such  con- 
ditions the  advantages  as  to  the  money  market  of  a 
series  of  short-term  issues  as  compared  with  a  single 
long-term  loan  would  seem  to  be  unmistakable. 

In  the  case  of  the  long-term  loan  there  is  likely 
to  be  strain  upon  the  money  market  as  funds  are 
withdrawn  from  circulation  or  from  deposit  ac- 
counts in  payment  of  bond  subscriptions.  In  the 
case  of  the  certificate  issues  there  will  be  smaller  al- 
though recurrent  requisition  upon  the  capital  market 
in  the  first  instance  and  earlier  relaxation  in  the 
second.  Not  only  will  the  total  disturbance  of  a 
succession  of  small  strains  be  less  than  the  disloca- 
tion of  a  single  great  strain ;  but  the  withdrawal 
strain  will  be  less  protracted  and  more  evenly  dis- 
tributed in  the  case  of  the  short-term  borrowing. 

The  foregoing  assumes  that  bond  subscriptions 
although  nominally  payable  in  installments  may 
nevertheless  be  over-paid  or  paid  in  full  at  the  first 
installment  date  at  the  option  of  the  subscribers  — 
and  that  this  practice  is  largely  followed,  as  has  ac- 
tually been  the  case  in  the  Liberty  Loan  flotations. 
It  is  conceivable  however  that  obligatory,  that  is 
"  un-anticipatible "  installment  payments  are  re- 
quired in  connection  with  the  bond  issue  and  that 
bond  receipts  are  promptly  expended  or  are  re- 
deposited  pending  such  expenditure  by  the  Treas- 
ury in  the  banks.  In  such  event  the  relative  ad- 
vantage of  certificate  issues  as  to  strain  upon  the 
money  market  will  be  less.     In  the  case  of  cer- 


THE  MONEY  MARKET  123 

tificate  borrowing  the  measure  of  relief  is  incor- 
porated in  the  borrowing  process  itself ;  in  the  case 
of  the  long-term  bond  it  is  injected  by  the  install- 
ment provision.  If  the  proportion  and  interval  of 
the  installment  quotas  of  the  long-term  loan  cor- 
respond with  the  volume  and  succession  of  the  cer- 
tificate issues  of  the  short-term  borrowing,  and  if 
the  redeposit  of  borrowed  funds  and  the  pace  of 
public  expenditure  proceed  alike  —  there  would 
seem  to  be  no  difference  possible  as  to  monetary  dis- 
turbance in  the  two  cases.  To  impute  any  advan- 
tage in  this  particular  to  certificate  borrowing,  it 
would  be  necessary  to  assume  that  all  or  certain  of 
these  conditions  as  to  the  long-term  loan  do  not  ob- 
tain. The  comparison  in  such  case  would  be  not 
between  certificate  borrowing  and  bond  borrowing 
as  such,  but  between  certificates  and  a  particular 
form  of  bond  issues. 

But  even  though  the  disturbance  incident  to  cer- 
tificate borrowing  were  less  acute  than  in  the  case 
of  a  direct  long-term  loan,  a  very  considerable  de- 
gree of  monetary  strain  and  dislocation  might  be 
expected  to  attend  certificate  borrowing;  whereas 
the  striking  fact  with  which  we  have  to  deal  is 
that  the  money  market  has  been  singularly  free 
from  such  disturbance  during  the  period  of  our  war 
borrowing.  This  seeming  anomaly  suggests  the 
presence  of  some  stabilizing  element  other  than  the 
borrowing  device  proper. 

Our  original  analysis  proceeded  on  the  simple  as- 
sumption that,  whatever  be  the  mode  of  borrowing, 
direct  methods  of  distribution  and  absorption  ob- 
tain;  that  is,   that  the   recurrent  certificate   issues 


124  WAR  BORROWING 

or  the  successive  long-term  bond  issues  are  absorbed 
directly  by  ultimate  investors  or  are  taken  over  by 
and  paid  for  by  the  banks  as  intermediaries  and 
simultaneously  or  subsequently  distributed  among 
investors;  in  short,  that  all  payments  are  made  in 
cash  or  exchange  without  the  creation  of  additional 
credit. 

It  is  possible  however  that  the  borrowing  process 
may  be  accompanied  by  the  creation  of  new  bank 
credit  against  which  no  additional  cash  reserves 
need  to  be  held.  The  installment  quotas  of  the 
long-temi  loan  or  the  principal  sums  of  the  cer- 
tificate issues  may  in  such  case  be  paid  to  the 
Treasury  by  subscribing  banks  wholly  or  in  part 
in  the  form  of  deposit  credits,  the  banks  eventually 
recouping  themselves  by  the  payments  of  ultimate 
investors,  in  cash  or  from  out  newly  created  de- 
posit credits.  Under  such  circumstances  there  will 
again  be  notably  less  strain  upon  the  money  market 
whether  the  Treasury  effect  its  borrowings  by  short- 
term  certificates  or  by  installment  payable  bond 
issues.  The  elements  of  relief  in  either  procedure 
will  consist  in  the  facts  ( i )  that  the  strain  of  pro- 
viding the  amount  borrowed  is  taken  off  the  banks 
by  their  ability  to  create  additional  deposit  credits 
against  which  no  reserves  need  be  held;  (2)  in  the 
ability  of  the  banks  to  create  by  rediscount  clearance 
balances  to  meet  government  withdrawals;  (3)  in 
the  ability  of  ultimate  investors  to  meet  the  strain  of 
bond  payments  by  bank  borrowings  or  from  out 
existing  resources  augmented  by  the  proceeds  of 
public  expenditure. 

The  possibility  of  avoiding  monetary  dislocation 


THE  MONEY  MARKET  125 

and  of  reducing  monetary  strain  in  connection  with 
war  borrowing  will  thus  be  a  consequence,  not  of 
the  use  of  anticipatory  certificates  of  indebtedness  in 
lieu  of  direct  long-term  loans,  but  of  an  ejffective 
credit  mechanism  developed  and  utilized  by  the 
banks  in  connection  with  such  borrowing.  Without 
this  mechanism  there  would  be  strain  in  the  case  of 
certificates  just  as  in  the  case  of  loans.  With  this 
mechanism  strain  will  be  reduced  in  the  case  of  cer- 
tificates, and  it  would  also  be  reduced  in  the  case 
of  loans.  Not  the  particular  borrowing  device  but 
the  accompanying  credit  apparatus  becomes  the  es- 
sential element  in  the  situation. 

Let  us  now  seek  for  verification  of  these  hypo- 
theses in  the  nature  of  the  credit  facilities  actually 
provided  in  connection  with  our  war  borrowing,  as 
well  as  in  the  extent  to  which  use  has  been  made  of 
such  facilities. 

The  credit  mechanism  developed  by  the  Treasury 
in  conjunction  with  the  Federal  Reserve  Board  for 
the  avoidance  of  jar  and  reduction  of  strain  in  the 
money  market  during  the  course  of  certificate  bor- 
rowing has  been  made  up  of  four  elements:  (a) 
redeposit  of  borrowed  funds  in  depositary  banks 
until  required  for  public  expenditure;  (b)  permis- 
sive payment  by  credit  on  the  part  of  lending  banks 
for  certificates  of  indebtedness  and  Liberty  Loan 
subscriptions;  (c)  exemption  of  government  de- 
posits held  by  depositary  banks  from  reserve  re- 
quirements; (d)  rediscount  facilities  of  member., 
and  non-member  banks  for  themselves  and  their 
customers  with  the  Federal  Reserve  Banks. 


126  WAR  BORROWING 

The  measures  taken  have  thus  been  of  two  gen- 
eral kinds:  (A)  those  designed  to  enable  the  lend- 
ing banks  to  make  the  necessary  advances  to  the 
Treasury  without  corresponding  curtailment  of  or- 
dinary business  accommodations,  and  (B)  those  de- 
signed to  permit  (i)  the  withdrawal  of  government 
deposits  and  (ii)  the  payment  of  subscriptions  to 
the  Liberty  Loans,  without  strain  upon  the  banks' 
resources  and  upon  the  general  money  market.  In 
the  first  group  have  been  the  redeposit  of  borrowed 
funds,  payment  by  credit  and  exemption  of  govern- 
ment deposits  from  reserve  requirements.  In  the 
second  group  have  been  the  rediscount  facilities  of 
the  Federal  Reserve  Banks,  extended  and  modified 
to  meet  the  new  exigency.  The  nature  and  growth 
of  these  policies  may  now  be  briefly  reviewed: 

(A)  One  of  the  important  reforms  which  the 
Federal  Reserve  act  of  1913  was  designed  to  ac- 
complish had  to  do  with  the  deposit  of  government 
funds.  Many  of  the  advocates  of  the  new  system 
"  believed  that  the  practice  of  depositing  govern- 
ment funds  in  thousands  of  banks  scattered  over 
the  country  was  a  vicious  and  expensive  one  "  and 
desired  that  the  new  law  should  "  make  the  federal 
reserve  banks  the  depositories  of  practically  all 
general  funds,  dispensing  with  the  use  of  individual 
banks  as  depositories  and  ultimately  with  the  in- 
dependent treasury  system."  ^^  As  passed,  the 
measure  vested  the  Secretary  of  the  Treasury  with 
full  discretionary  powers  in  this  respect.  But  it 
was  expected  that  this  officer  "  in  the  exercise  of 

13  Kemmerer,  "  The  A  B  C  of  the  Federal  Reserve  System  " 
(Princeton,  1918),  p.  83. 


THE  MONEY  MARKET  127 

the  discretion  granted  him  by  the  law,  would  de- 
posit his  funds  in  a  large  and  increasing  degree  in 
federal  reser^-e  banks."  The  practice  of  the 
Treasury  tended  in  this  direction  up  to  the  entrance 
of  the  United  States  into  the  war.  The  actual 
course  of  events  has  been  lately  described  with  great 
clearness  by  the  Governor  of  the  Federal  Reserv^e 
Bank  of  New  Yorkr^* 

"  The  first  deposit  of  government  funds  made  by  the 
treasury  with  the  federal  reserve  banks  was  on  Septem- 
ber 4,  1915,  when  certain  special  deposits  were  made  in 
a  number  of  banks.  Later,  arrangements  were  made  to 
have  the  collectors  of  customs  and  collectors  of  internal 
revenues  in  the  twelve  federal  reserve  bank  cities  deposit 
all  of  their  funds  in  the  federal  reserve  banks  and  as  a 
matter  of  fact,  for  a  long  period  prior  to  the  passage  of 
the  bond  act  of  April  24.  191 7,  which  altered  the  status 
of  public  deposits,  the  federal  reserve  banks  had  been 
receiving  the  principal  revenues  of  the  Government  outside 
of  postal  funds  and  had  been  paying  a  very  large  propor- 
tion of  government  checks  and  warrants.  The  limitation 
of  this  fiscal  agency  service  in  the  collection  of  revenues 
and  payment  of  checks  to  the  twelve  federal  reserve  bank 
cities  was,  of  course,  due  to  the  inconvenience  of  extend- 
ing these  operations  to  places  where  federal  reserve  banks 
had  not  yet  established  branches.  The  plan  therefore  of 
actively  employing  the  federal  reserve  banks  as  fiscal 
agents  had  been  put  into  operation  some  time  before 
the  first  bond  bill  was  passed  and  was  an  important  and 
very  active  part  of  the  work  of  the  reserve  banks  almost 
immediately  after  the  arrangement  was  established." 

A  clause  of  the  First  Liberty  Loan  act  con- 
tained the  important  proviso  that  all  existing  stat- 
utes with  reference  to  the  reserve  required  to  be 

1*  Ibid.,  pp.  85-6. 


128  WAR  BORROWING 

kept  by  national  banking  associations  and  other 
members  of  the  Federal  Reserve  System  should  not 
apply  to  "  deposits  of  public  moneys  by  the  United 
States  in  designated  depositaries."  This  provision 
was  promptly  construed  to  mean  that  such  banks 
would  not  be  required  to  maintain  reserves  against 
any  deposits  made  by  the  United  States  in  desig- 
nated depositaries,  regardless  of  the  source  of  the 
funds  deposited  —  without,  however,  such  exemp- 
tion applying  to  government  deposits  in  the  Fed- 
eral Reserve  Banks. '^^ 

The  occasion  for  redepositing  borrowed  funds 
did  not  present  itself  in  conjunction  with  the  ante- 
bellum issue  of  certificates  of  March  31,  1917.  The 
issue  was  taken  in  entirety  by  the  Federal  Reserve 
Banks,  payment  being  made  in  the  form  of  new  or 
additional  government  deposits  to  the  credit  of  the 
Treasurer's  general  account.  A  different  proced- 
ure developed  with  the  initiation  of  war  borrowing 
proper,  and  the  transfer  of  the  lending  function 
from  the  Federal  Reserve  Banks  to  the  member 
and  non-member  banks.  The  First  Liberty  Loan 
act  authorized  the  Secretary  of  the  Treasury  in 
his  discretion  to  deposit  in  such  banks  and  trust 
companies  as  he  might  designate  the  proceeds  or 
any  part  thereof  arising  from  the  sale  of  certificates 
of  indebtedness  and  bonds.  The  deposits  were  to 
be  secured  in  the  manner  required  for  other  de- 
posits by  existing  law,  and  to  bear  such  rate  of  in- 
terest and  be  subject  to  such  terms  and  conditions 
as  the  Secretary  of  the  Treasury  might  impose  — 
with  the  restriction  that  the  amount  so  deposited 

15  Federal  Reserve  Bulletin,  June,  1917,  p.  458. 


THE  MONEY  MARKET  129 

should  not  in  any  case  "  exceed  the  amount  with- 
drawn from  any  such  bank  or  trust  company  and 
invested  in  such  bonds  or  certificates  of  indebted- 
ness plus  the  amount  so  invested  by  such  bank  or 
trust  company."  ^''  Only  moderate  use  was  made 
of  this  privilege  in  connection  with  the  four  cer- 
tificate issues  in  anticipation  of  the  First  Liberty 
Loan,  134  national  and  100  state  banks  and  trust 
companies  in  six  Federal  Resen^e  Districts  making 
application  and  being  duly  designated  as  deposi- 
taries for  such  funds.  ^'^ 

The  number  of  banks  qualifying  as  government 
depositaries  increased  rapidly  with  the  adoption  of 
payment  by  credit  in  conjunction  with  the  flotation 
of  the  First  Liberty  Loan.  On  May  14,  19 17,  the 
►Secretary  of  the  Treasury  invited  subscriptions  to 
the  First  Liberty  Loan.^^  Two  weeks  later  an- 
nouncement ^^  vvas  made  in  outline  of  the  payment 
by  credit  plan  —  the  introduction  of  which  has 
heretofore  been  discussed  and  the  immediate  antici- 
pation of  which  may  be  sought  in  the  mode  of  pay- 
ment used  by  the  Federal  Reserve  Banks  for  the 
ante-bellum  issue  of  certificates  of  indebtedness  of 
March  31,  1917.  In  order  "to  avoid,  even  tem- 
porarily, a  derangement  of  the  money  situation," 
the  Secretary  of  the  Treasury  "  earnestly  requested  " 
all  incorporated  banks  and  trust  companies  which 
had  or  expected  to  have  payments  to  make  for  them- 
selves or  for  others  on  account  of  subscriptions  to 

^®  Section  7. 

''"Report  of  the  Secretary  of  the  Treasury,  191 7."  P-  25. 

18  Treasury  Department  Circular  No.  78,  of  May  14,  1917. 

19  Treasury  Department  Circular  No.  81,  of  May  29,  1917. 


I30  WAR  BORROWING 

the  loan,  to  acquire  "  as  and  when  offered  "  Treas- 
ury certificates  of  indebtedness  "  to  as  large  an 
amount  as  practicable  and  at  least  equal  to  50  per 
cent,  of  the  payments  which  they  will  have  to  make 
from  time  to  time  on  account  of  subscriptions,  and 
that  they  utihze  such  certificates  of  indebtedness  in 
making  payment."  To  encourage  banks  to  make  at 
least  50  per  cent,  of  their  payments  in  certificates 
of  indebtedness,  the  Treasury  announced  that  gov- 
ernment deposits  would  thereafter  be  readjusted 
with  respect  to  those  using  more  or  less  certificates 
than  this  percentage,  so  as  to  remain  in  proportion 
with  the  amount  of  non-credit  items  actually  used, 
provided  that  the  amount  of  such  deposits  should 
not  in  any  event  exceed  the  cash  and  certificates 
used. 

Beyond  this,  banks  and  trust  companies  duly 
qualified  as  depositaries  having  payments  to  make 
on  account  of  subscriptions  for  $100,000  or  more 
bonds  might  make  payment  upon  such  subscriptions 
on  June  28,  19 17,  as  to  any  amount  not  paid  in  cer- 
tificates of  indebtedness  "  by  credit  on  their  books 
to  the  account  of  the  Treasurer  of  the  United 
States."  The  amounts  so  credited  were  to  be  al- 
lowed two  per  cent,  interest  by  the  depositaries  sub- 
ject to  withdrawal  from  time  to  time  when  and  as 
required.  The  Treasury  further  announced  that 
the  limitation  of  the  payment  by  credit  plan  to  in- 
stitutions subscribing  $100,000  or  more  was  made 
necessary  by  the  brief  time  prior  to  July  2,  191 7, 
for  passing  upon  depositary  qualifications,  but 
added  that  as  soon  thereafter  as  practicable  the  pro- 
ceeds of  the  loan  would  be  redeposited  with  qualified 


THE  MONEY  MARKET  131 

banks  "  in  a  proportion,  yet  to  be  determined,  based 
upon  the  amounts  of  bonds  of  the  Liberty  Loan  for 
which  subscriptions  are  filed  by  and  through  them, 
and  upon  the  amount  of  Treasury  certificates  of  in- 
debtedness acquired  by  them  and  utiHzed  in  payment 
thereupon  on  or  before  June  28." 

The  detailed  procedure  to  be  followed  by  sub- 
scribing banks  and  trust  companies  in  making  pay- 
ment by  credit  for  bonds  of  the  First  Liberty  Loan 
or  in  receiving  deposits  of  public  funds  in  connec- 
tion therewith  was  set  forth  by  the  Treasury  on 
May  29,  igiy.-^  Having  duly  qualified  with  the 
Federal  Reserve  Bank  of  its  district  as  a  depositary 
for  a  designated  amount,  the  bank  was  required  to 
open  and  maintain  for  the  account  of  the  Treasurer 
of  the  United  States  a  separate  account  to  be  known 
as  the  "  Liberty  Loan  Deposit  Account."  On  or  be- 
fore June  28,  191 7,  each  such  depositary  was  re- 
quired to  transfer  to  the  Liberty  Loan  Deposit  Ac- 
count "  the  amount  then  payable  by  it  otherwise  than 
in  certificates  of  indebtedness  on  its  own  subscription 
and  on  the  subscriptions  of  others  made  through  it  to 
Liberty  Bonds,"  and  to  transmit  certificates  of  ad- 
vice as  to  such  deposit  to  the  Treasurer  of  the 
United  States  and  the  Federal  Reserve  Bank  of  the 
district.  Thereafter  the  Federal  Reserve  Bank  act- 
ing as  fiscal  agent  of  the  United  States  credited  the 
subscriber  with  the  amount  as  a  payment  or  part 
payment  of  the  amount  due  on  June  28,  and  the 
subscriber  as  depositary  was  charged  with  the 
amount  of  such  deposit  by  the  Treasurer  of  the 
United  States. 
2"  Treasury  Department  Circular  No.  81. 


132  WAR  BORROWING 

Although  the  foregoing  facilities  were  extended 
only  to  banks  subscribing  for  $100,000  or  more,  the 
Treasury  regarded  it  as  "  entirely  admissible  for 
banks  and  trust  companies  in  any  region  or  regions, 
by  voluntary  association  among  themselves  to  pool 
their  subscriptions  and  payments  "  and  to  designate 
one  of  their  number  through  which  subscriptions 
should  be  made,  and  which  should  be,  as  between  it- 
self and  the  United  States,  regarded  as  the  respon- 
sible subscriber  and  depositary.  The  Treasury  re- 
stated its  intention  to  in  any  event  deposit  funds 
with  banks  subscribing  less  than  $100,000  as  soon 
after  July  2  as  practicable,  "  as  nearly  as  may  be 
in  proportion  to  the  payments  of  each  in  cash  and 
certificates  of  indebtedness  upon  subscriptions  to 
the  Liberty  Loan."  Under  this  authority,  125 1 
national  and  780  state  banks  and  trust  companies 
made  application  and  were  designated  as  deposi- 
taries of  public  moneys,  becoming  thereby  qualified 
to  make  payment  by  credit  for  bonds  of  the  First 
Liberty  Loan  and  to  receive  cash  deposits  of  funds 
realized  from  the  sale  of  bonds.^^ 

Certificate  borrowing  was  resumed  in  anticipation 
of  the  Second  Liberty  Loan  without  change  in  mode 
of  pa}Tnent  or  manner  of  deposit,  other  than  that 
the  number  of  special  depositaries  was  further  in- 
creased by  83  national  and  72  state  banks  and  trust 
companies  which  subscribed  for  the  certificates  of 
August  9,  19 1 7.  But  with  the  next  succeeding  issue 
(August  28,  19 1 7)  payment  by  credit  was  generally 
extended,  as  we  have  seen,  by  administrative  toler- 
ance to  certificate  borrowing  and  this  device  con- 

21  "  Report  of  the  Secretary  of  the  Treasury,  1917,"  p.  25. 


THE  MONEY  MARKET  133 

tinued  thereafter  to  dominate  our  anticipatory  bor- 
rowing. 

With  the  widening  use  of  payment  by  credit  in 
settlement  of  bond  subscriptions  and  certificate  bor- 
rowings, the  quaHfication  and  designation  of  lending 
banks  as  government  depositaries  took  on  a  new  sig- 
nificance. Instead  of  serving  in  the  traditional  way 
as  the  device  whereby  funds  withdrawn  from  the 
channels  of  trade  and  otherwise  impounded  could 
be  immediately  returned  —  a  government  deposi- 
tary came  to  mean  in  practice  a  bank  by  or  through 
which  after  proper  qualification  a  short-term  loan 
might  be  granted  to  the  Treasury  in  the  form  of  a 
retained  deposit  account,  the  loan  being  evidenced 
on  the  part  of  the  bank  by  ownership  of  certifi- 
cates of  indebtedness,  and  the  deposit  being  secured 
for  the  benefit  of  the  Treasury  by  the  hypothecation 
of  such  certificates  or  of  other  banking  collateral. ^^ 

The  Second  Liberty  Loan  Act  had  again  pro- 
vided for  the  deposit  of  the  proceeds  accruing  from 
the  sale  of  bonds,  certificates  of  indebtedness  and 
war  savings  certificates  in  such  incorporated  banks 
and  trust  companies  and  subject  to  such  terms  and 
conditions  as  the  Secretary  of  the  Treasury  might 

22  The  distinction  is  clearly  apparent  in  the  later  measures 
taken  by  the  Treasury  (May  29,  1918)  to  avoid  unnecessary 
dislocation  of  funds  incident  to  the  payment  of  income  and  ex- 
cess profits  taxes,  due  and  payable  on  June  15,  1918.  Un- 
expended cash  proceeds  arising  from  the  payment  of  such  taxes 
were  to  be  deposited  through  the  Federal  Reserve  Banks  with 
qualified  depositaries,  "  as  nearly,  as  may  be,  .  .  .  simultane- 
ously with  the  payment  of  checks  drawn  upon  such  deposi- 
taries, respectively,  in  payment  of  such  taxes "  (see  p.  138, 
below).  But  specific  notification  was  given  that  "payment  of 
income  and  excess  profits  taxes  cannot  be  made  by  credit." 


134  WAR  BORROWING 

prescribe.  The  reserve  requirements  of  the  na- 
tional banks  and  the  Federal  Reserve  System  were 
as  before  made  inapplicable  to  government  deposits 
in  designated  depositaries.^^ 

The  administrative  regulations  subsequently  is- 
sued ^^  followed  in  the  main  the  procedure  used  in 
connection  with  the  First  Liberty  Loan.  Application 
for  government  deposits  was  to  be  made  by  any  in- 
corporated bank  or  trust  company  in  the  United 
States  to  the  Federal  Reserve  Bank  of  the  district, 
and  such  applicant  bank  upon  the  recommendation 
of  the  Federal  Reserve  Bank  might  be  designated  by 
the  Secretary  of  the  Treasury  as  an  approved  de- 
positary. In  fixing  the  maximum  amount  of  de- 
posits sought,  the  applicant  bank  "  should  be  guided 
by  the  amount  of  the  payments  which  it  expects  to 
have  to  make,  for  itself  and  its  customers,  on  ac- 
count of  allotments  of  such  bonds  and  certificates  " 
as  well  as  by  any  statutory  limitations  upon  the 
amount  of  deposits  receivable  by  any  one  depositary. 
In  making  application,  only  the  maximum  amount 
of  the  desired  deposit  was  required  to  be  set  forth 
and  not  the  further  particulars  as  to  the  amount  of 
the  prospective  subscription  and  the  amount  and 
composition  of  the  first  installment  payment  —  as 
required  in  the  First  Liberty  Loan,  As  collateral 
security  for  such  deposits,  eight  classes  of  securities 
were  enumerated  somewhat  broader  in  scope  but 
subject  to  approval  and  valuation  by  the  several 

23  Section  8. 

2*  Department  Circular  of  October  6,  1917  (in  "Report  of 
Comptroller  of  the  Currency,  1917,"  Exhibit  I). 


THE  MONEY  MARKET  135 

Federal  Reserve  Banks  acting  under  the  direction 
of  the  Secretary  of  the  Treasury  through  local  "  se- 
curities committees."  Each  qualified  depositary 
was  required  to  open  and  maintain  for  the  account 
of  the  Federal  Reserve  Bank  of  its  district  as  fiscal 
agent  of  the  United  States  a  separate  account  for 
deposits  to  be  made  thereunder  to  be  known  as  the 
"  war  loan  deposit  account." 

Qualified  depositaries  were  to  be  permitted  to 
make  payment  by  credit  when  due  of  amounts  pay- 
able on  subscriptions  made  by  or  through  them  for 
certificates  and  for  bonds.  To  make  payment  by 
credit  the  depositary  was  required  as  theretofore 
to  notify  the  Federal  Reserve  Bank  of  the  district 
by  letter  or  telegram  to  reach  it  on  or  before  the 
date  when  such  payment  was  due,  and  to  issue  a  cer- 
tificate of  advice  to  such  Federal  Reserve  Bank  stat- 
ing that  a  sum  specified  (in  addition  to  all  other 
amounts  standing  to  its  credit)  had  been  deposited 
with  such  depositary  for  the  account  of  the  Federal 
Reserve  Bank  as  fiscal  agent  of  the  United  States  in 
the  war  loan  deposit  account.  Announcement  was 
also  made  that  the  unexpended  cash  proceeds  of  the 
sale  of  any  issue  of  certificates  and  bonds  would  be 
placed  among  the  qualified  depositaries  "  as  nearly 
as  may  be  in  proportion  to  the  subscriptions  made  by 
and  through  them  for  such  issue."  All  deposits  and 
withdrawals  were  to  be  made  by  the  Federal  Reserve 
Banks  by  direction  of  the  Secretary-  of  the  Treasury. 

Redeposit  of  certificate  borrowings  and  of  loan 
receipts  continued  to  be  made  under  the  Treasury 
regulations  of  May  29,  1917,  up  to  October  6,  1917, 


136  WAR  BORROWING 

after  which  the  regulations  of  that  date  governed. 
Such  deposits  comprised  with  respect  to  bond  sub- 
scriptions cash  and  credit  items  throughout;  with 
respect  to  certificate  borrowings,  only  cash  items 
figured  to  any  considerable  extent  until  the  issue  of 
August  28,  19 1 7,  when  payment  by  credit  was  first 
generally  used.  The  deposits  were  distinguished  as 
to  source  in  the  general  account  of  the  Treasurer 
as  "Deposits  in  Special  Depositaries:  (a)  Account 
of  sales  of  certificates  of  indebtedness,  (b)  Liberty 
Loan  Deposits" — until  April  26,  1918,  when  the 
two  accounts  were  merged  in  a  general  entry  to 
which  eventually  redeposited  receipts  from  income 
and  excess  profits  taxes  were  added. 

In  connection  with  the  early  borrowings  it  had 
been  necessary  for  the  banks  to  make  application  and 
to  be  designated  as  depositaries  each  time  they  sub- 
scribed to  certificates  and  bonds  and  desired  to  pay 
for  them  by  credit.  Subsequently  a  general  quali- 
fication was  permitted,  whereby  banks  duly  qualified 
as  government  depositaries  might  make  payment 
by  credit  and  might  receive  deposits  on  account  of 
their  subscriptions  to  any  one  or  all  of  the  various 
issues  of  bonds  and  certificates  of  indebtedness, 
without  the  necessity  of  new  application  and  desig- 
nation in  each  instance. 

Stimulated  in  this  manner,  the  number  of  govern- 
ment depositaries  increased  rapidly.  At  the  close 
of  business  on  November  13,  1917  —  the  eve  of 
the  flotation  of  the  Second  Liberty  Loan  —  1903 
national  banks  and  1343  state  banks  and  trust  com- 
panies had  been  so  designated,  and  a  month  later 
the  annual  report  of  the  Secretary  of  the  Treasury 


THE  MONEY  MARKET  137 

reported  a  further  increase  to  2228  national  and 
1590  state  banks  and  trust  companies. ^^ 

With  the  systematic  enHstment  of  the  banking 
strength  of  the  country  in  the  heavier  certificate  bor- 
rowing anticipatory  of  the  Third  Liberty  Loan,  the 
number  of  government  depositaries  and  the  volume 
of  payment  by  credit  underwent  corresponding  de- 
velopment. The  records  of  the  Treasury  Depart- 
ment are  not  kept  in  such  manner  as  to  permit  with- 
out special  compilation  the  actual  number  of  deposi- 
taries on  given  dates,  the  lists  being  added  to  from 
time  to  time  as  banks  are  designated.  At  the  latest 
date  ^  for  which  figures  have  courteously  been 
made  available  the  total  number  of  depositaries  had 
increased  to  5868,  of  which  3140  were  national 
banks  and  2728  were  state  banks  and  trust  com- 
panies. 

On  April  10,  1918,  the  administrative  regulations 
then  in  force  as  to  redeposit  of  funds  and  pay- 
ment by  credit  were  renewed  in  preparation  for  the 
Third  Liberty  Loan,  with  certain  interesting  modi- 
fications. Qualified  depositaries  were  permitted  to 
use  payment  by  credit  —  up  to  the  amount  for  which 
each  should  be  qualified  in  excess  of  existing  de- 
posits for  amounts  due  and  payable  on  subscrip- 
tions to  bonds  made  by  or  through  them;  but  such 
banks  were  enjoined,  in  order  "  to  prevent  unneces- 
sary dislocation  of  funds,"  to  make  payment  in  cer- 
tificates of  indebtedness  instead  of  by  credit  to  the 
extent  that  they  held  certificates  maturing  on  the 

25  "  Report  of  Secretary  of  the  Treasury,  1917,"  p.  25  (dated 
December  3,  1917) . 
28  July  9.  1918. 


138  WAR  BORROWING 

date  the  payment  on  bond  subscriptions  was  due  at 
Federal  Reserve  Banks.  This  did  not  apply  to 
payment  for  bonds  for  advance  delivery,  as  to  which 
payment  by  credit  was  permitted.  On  the  other 
hand  "  to  reduce  the  float  as  far  as  practicable,'' 
any  qualified  depositary  might  make  payment  by 
credit  of  amounts  which  its  correspondent  banks 
or  trust  companies  would  otherwise  pay  by  check 
upon  the  depositary,  and  this  might  be  done  whether 
the  depositary  and  the  correspondent  were  located 
in  the  same  District  or,  after  telegraphic  advice  and 
ample  notice,  in  different  Districts. 

On  May  29,  1918,  the  foregoing  provisions  were 
extended  in  so  far  as  applicable,  to  the  deposit  with 
qualified  banks  of  money  arising  from  the  payment 
of  1918  income  and  excess  profits  taxes.  Such 
payments  might  not  be  made  by  credit ;  but  in  lieu 
thereof  the  Treasury  announced  that  receipts  would 
be  deposited  "  as  nearly  as  may  be, —  simultane- 
ously with  the  payment  of  checks  drawn  upon 
such  depositaries,  respectively,  in  payment  of  such 
taxes,"  and  "  as  nearly  as  may  be  proportionately, 
having  regard  to  the  following  three  determining 
factors  "  :  ( i )  the  actual  withdrawals  for  tax  pay- 
ments from  the  respective  depositaries,  (2)  the  vol- 
ume of  tax  anticipation  certificates  sold  to  and 
through  such  depositaries,  and  (3)  the  amount  for 
which  such  depositaries  respectively  should  be  quali- 
fied in  excess  of  existing  deposits. ^'^ 

The  certificate  borrowing  in  anticipation  of  the 
Fourth  Liberty  Loan  was  carried  out  in  conformity 

.  27  Treasury  Department  Circular  No.  92,  amended  as  of  May 
29,  1918. 


THE  MONEY  MARKET  139 

with  existing  procedure  as  to  payment  by  credit  and 
redeposit  of  funds;  and  the  revision  of  the 
Treasury's  administrative  regulations  on  Septem- 
ber 21,  19 1 8,  in  immediate  preparation  for  the 
flotation,  effected  no  material  changes.  But  the  ex- 
traordinary increase  of  "  war  paper  "  in  the  port- 
folios of  the  Federal  Reserve  Banks,  consequent 
upon  the  largely  prevailing  use  of  payment  by 
credit  in  settlement  of  the  certificates  of  indebted- 
ness by  subscribing  banks,  was  giving  concern  to 
the  Federal  Reserve  Board  and  to  those  responsible 
for  the  nation's  financial  affairs.  On  July  8,  1918, 
the  Governor  of  the  Federal  Reserve  Board  ad- 
dressed a  letter,  through  the  Federal  Reserve  Banks 
to  every  national  bank,  state  bank  and  trust  company 
urging  among  other  things,  in  the  interest  of  credit 
conservation  and  with  a  view  to  checking  inflation 
and  rising  prices,  that  payment  for  certificates  of  in- 
debtedness be  made  by  subscribing  banks  in  so  far 
as  possible  from  their  own  funds  instead  of  through 
rediscounting  at  the  Reserve  Banks :  ^^ 

"  The  Federal  Reserve  Banks  will  be  prepared  to  place 
their  facilities  —  directly  or  indirectly  —  at  the  disposal 
of  such  subscribing  banks  as  may  legitimately  need  assist- 
ance in  taking  their  allotments.  The  Board,  however, 
feels  in  duty  bound  to  reiterate  that  the  banks  can  render 
a  greater  service  to  the  country  in  this  connection,  not 
merely  by  subscribing  their  allotments  and  by  using  the 
rediscounting  facilities  of  the  Federal  Reserve  Banks  in 
making  payments,  but  by  providing  the  necessary  funds 
for  meeting  payments  for  certificates  of  indebtedness  pur- 
chased, by  employing  for  this  purpose  the  accretion  of  new 
deposits,  and  by  utilizing  the   funds  that  may  be  made 

28  Federal  Reserve  Bulletin,  August  1918,  p.  686. 


I40  WAR  BORROWING 

available  by  a  judicious  curtailment  of  credits  asked  for 
nonessential  purposes." 

Despite  the  intent  of  such  injunction  there  was 
no  apparent  lessening  of  the  pressure  upon  the 
financial  institutions  of  the  country  to  qualify  as 
government  depositaries  and  to  employ  credit  in 
payment  for  subscriptions  to  the  Fourth  Liberty 
Loan.  On  September  26,  19 18,  the  Federal  Re- 
serve bank  of  New  York  advised  the  banks  of  the 
District  that :  ^^ 

"If  you  have  already  received  your  designation  as  a 
depositary  for  Government  funds,  it  will  not  be  necessary 
for  you  to  qualify  again  unless  you  desire  to  increase  your 
present  designation.  If,  however,  you  have  not  already 
applied  and  qualified  as  a  depositary,  we  beg  to  express 
the  hope  that  you  will  communicate  with  us  at  once  in  this 
regard  so  that  you  may  receive  such  designation  promptly 
and  be  placed  in  position  to  pay  by  book  credit  in  full  or 
in  part  for  the  bonds  allotted  to  you,  thus  cooperating  to 
the  fullest  extent  in  the  Government's  plan  for  effecting 
payments  and  stabilizing  money  conditions.  Your  imme- 
diate attention  to  this  matter  will  be  greatly  appreciated." 

In  the  same  spirit  the  mandatory  restriction  as  to 
the  use  of  payment  by  credit,  present  in  the  Third 
Liberty  Loan,  was  replaced  by  a  discretionary  pro- 
vision in  the  administrative  regulation  issued  as  to 
the  payment  of  subscriptions  to  the  Fourth  Liberty 
Loan: 

"  The  right  is  reserved  to  require  that  qualified  depositaries 
make  payment  by  credit  only  to  the  extent  that  they  can- 

29  Commercial  and  Financial  Chronicle,  October  19,  1918,  pp. 
1521-2.  To  such  institutions  as  had  not  qualified  as  deposi- 
taries a  "  follow-up  "  letter  was  sent  on  October  11,  1918  (ibid., 
p.  1522). 


THE  MONEY  MARKET  141 

not  make  such  payment  in  Treasury  certificates  of  indebt- 
edness maturing  or  called  for  redemption  on  the  date  the 
payment  on  bond  subscriptions  is  due  at  Federal  Reserve 
banks." 

Starting  thus  from  a  familiar  and  thoroughly 
accredited  procedure  for  reducing  the  monetary 
strain  incident  to  public  borrowing  by  a  prompt 
restoration  in  the  form  of  adequately  protected  re- 
deposits  of  the  funds  so  withdrawn  from  the  chan- 
nels of  trade,  the  Treasury  succeeded  in  organizing 
the  banking  strength  of  the  country  under  the  direc- 
tion of  the  Federal  Reserve  Banks  into  a  body  of 
depositary  banks  the  prime  service  of  which  has 
been  the  advance  by  or  through  such  banks  of  de- 
posit currency  under  the  designation  of  government 
deposits  in  consideration  of  the  delivery  of  certifi- 
cates of  indebtedness.  Such  banks  are  government 
depositaries  in  the  sense  that  they  retain  the  deposit 
credits  which  they  have  created  until  remitted  to 
the  Federal  Reserve  Banks  for  disbursement  by  the 
Treasury  in  the  course  of  public  expenditure.  But 
their  essential  service  is  not  the  retention  of  such 
deposit  credits,  but  their  creation. 

The  certificate  borrowing  of  the  Treasury,  in  its 
first  phase,  thus  exposed  the  money  market  to  mini- 
mum strain  and  averted  all  likelihood  of  monetary 
dislocation.  The  government's  monetary  requisi- 
tions were  adequately  met  by  a  fund  of  deposit  cur- 
rency, and  the  procedure  employed  —  payment  by 
credit,  redeposit  of  funds  and  exemption  from  re- 
serve requirements  —  replenished  this  fund  as  re- 
quired or  desired,  by  the  emission  of  certificates  of 
indebtedness  without  corresponding  withdrawal  or 


142  WAR  BORROWING 

curtailment  of  banking  credit  in  other  quarters. 
The  deposit  currency  created  in  this  manner  is  not 
unfairly  described  as  fiat  —  not  a  deduction  from  an 
existing  limited  stock  but  the  provision  of  a  new 
additional  supply  with  no  limitation  short  of  the 
remote  check  of  an  ultimate  gold  reserve.  Where 
the  mechanism  creaked  and  some  degree  of  pressure 
developed,  it  was  because  of  the  banks'  failure, 
through  conservatism  or  inertia  to  utilize  adequately 
the  facilities  afforded  —  qualification  as  government 
depositary  and  payment  by  credit.  There  could  ob- 
viously be  no  question  of  monetary  strain  or  dis- 
location incident  to  a  borrowing  device  when  the 
accompaniment  of  that  device  was  a  mechanism 
which  supplied,  for  the  asking,  a  practically  unlim- 
ited fund  of  the  thing  borrowed. 

(B)  Certificate  borrowing  exposes  the  money 
market  to  possible  strain  and  dislocation  at  three  suc- 
cessive stages :  ( i )  in  providing  the  credit  or  cur- 
rency to  be  put  at  the  disposition  of  the  Treasury; 
(2)  in  meeting  the  withdrawal  of  government  de- 
posits in  the  course  of  public  expenditure  —  assum- 
ing the  borrowed  funds  or  established  credits  to 
have  been  redeposited  in  the  lending  banks;  (3)  in 
paying  subscriptions  to  the  Liberty  Loan  in  an- 
ticipation of  which  the  certificates  of  indebtedness 
have  been  issued.  We  have  seen  how  redeposit  of 
borrowed  funds,  payment  by  credit  and  exemption 
of  government  deposits  from  reserve  requirements 
have  been  competent  to  avert  monetary  strain  at 
the  first  stage.  It  remains  now  to  point  out  how  the 
rediscount  facilities  of  the  Federal  Reserve  System 


THE  MONEY  MARKET  143 

have  prevented  monetary  dislocation  at  the  second 
and  third  stages. 

With  the  absorption  of  each  successive  issue  of 
certificates  of  indebtedness  by  the  lending  banks, 
the  Treasury  has  found  itself  in  possession  of  the 
borrowed  funds  or  credits  in  the  form  of  govern- 
ment deposits  held  in  an  increasing  number  of 
national  banks,  state  banks  and  trust  companies, 
qualified  as  special  depositaries. 

As  required  in  the  probable  course  of  public  ex- 
penditure such  funds  have  upon  notification  been 
remitted  to  the  Federal  Reserve  Banks  and  thence 
disbursed  in  payment  of  public  accounts.  The  ac- 
tual procedure  followed  in  making  such  withdraw- 
als has  been  as  follows :  ^^  About  five  days  before 
the  Treasury  desires  to  withdraw  funds  from  special 
depositaries  each  bank  is  notified  by  the  Federal 
Reserve  Bank  of  the  amount  that  it  will  be  expected 
to  pay  on  account  of  its  government  deposits.  On 
the  day  the  payment  is  to  be  made  the  bank,  if  a 
member  of  the  Federal  Reserve  System  and  not 
holding  sufficient  funds  for  that  purpose,  may  dis- 
count its  own  note  with  the  Federal  Reserve  Bank 
and  use  the  funds  so  obtained  to  pay  the  amount 
required.  In  the  case  of  a  non-member  bank  the 
loan  must  be  made  through  a  member  bank.  The 
member  bank's  note  may  be  secured  by  the  certifi- 
cates which  had  been  previously  used  as  collateral 
for  its  government  deposits,  but  which  have  now 
been  released  by  payment  on  this  account.  When 
these  certificates  mature  or  are  used  to  pay  for  bonds 

30  Memorandum  of  Mr.  Frederic  H.  Curtiss,  of  the  Federal 
Reserve  Bank  of  Boston. 


144  WAR  BORROWING 

of  the  next  Liberty  Loan,  the  member  bank  may 
substitute  as  security  for  its  notes  the  notes  of  its 
customers  secured  in  turn  by  the  new  Liberty  Loan 
bonds.  As  payments  are  received  from  these  cus- 
tomers, or  as  the  bank  obtains  funds  in  other  ways, 
it  is  enabled  gradually  to  reduce  the  amount  of  its 
borrowings  from  the  Federal  Reserve  Bank. 

The  periodic  withdrawal  of  government  deposits 
in  the  form  of  remittance  of  quotas  to  the  Federal 
Reserve  Banks  might  be  expected  to  subject  the  re- 
sources of  the  depositary  banks  to  recurrent  strain 
—  reflected  in  turn  in  general  monetary  disturbance. 
Eventually  the  funds  so  remitted  and  thereafter 
disbursed  in  government  expenditure  would,  in  part 
at  least,  find  their  way  back  into  the  banks ;  but  the 
interval  would  be  considerable  enough  to  cause  mone- 
tary discomfort. 

In  anticipation  of  this  tendency  the  Federal  Re- 
serve Board  took  early  steps  to  ensure  that  "  there 
should  be  no  disturbance  in  the  money  market  and 
that  interest  rates  should  be  normal  and  as  free  as 
possible  from  fluctuation."  Accordingly  before  the 
subscriptions  to  the  First  Liberty  Loan  had  closed 
and  in  anticipation  of  the  Federal  Reserve  amend- 
ments of  July  21,  1918,  the  Federal  Reserve  Board 
established  a  preferential  rate  of  discount  for  notes 
of  member  banks  secured  by  government  obliga- 
tions —  certificates  or  bonds.  Federal  Reserve 
Banks  were  further  authorized  to  discount  for  non- 
member  banks,  upon  the  endorsement  of  a  member 
bank,  notes  secured  by  government  obligations, 
whether  made  by  the  non-member  banks  themselves 
or  by  their  customers,  when  the  proceeds  had  been 


THE  MONEY  MARKET  145 

or  were  to  be  used  for  carrying  certificates  or  bonds. 
Beyond  this  a  general  assurance  was  given  savings 
banks  and  trust  companies  that  "  the  Board  desired 
in  every  way  to  cooperate  with  them  in  avoiding 
stringency  and  that  the  Federal  Reserve  banks  were 
prepared  to  extend  through  member  banks  every 
reasonable  accommodation  not  inconsistent  with  law 
for  the  purpose  of  relieving  any  strain  which  might 
result  from  withdrawals  of  deposits  for  purchases 
of  government  deposits."  "^ 

This  policy  of  preparedness  involved  important 
changes  in  discount  schedules  and  rates,  as  fol- 
lows :  ^^ 

1.  The  establishment  of  a  rate  of  three  per  cent,  per 
annum  for  the  discount  at  Federal  Reserve  Banks  of  notes 
of  member  banks  running  not  longer  than  15  days  secured 
by  Treasury  certificates  of  indebtedness. 

2.  The  establishment  of  a  rate  of  discount  at  Federal 
Reserve  banks  of  three  and  one-half  per  cent,  per  annum 
for  customers'  notes  running  up  to  90  days,  secured  by 
Government  obligations  and  indorsed  by  member  banks, 
when  such  notes  had  been  made  for  the  purpose  of  obtain- 
ing funds  for  the  purchase  of  Government  obligations. 

3.  The  authorization  of  Federal  Reserve  banks  to  dis- 
count for  member  banks,  on  behalf  of  non-member  banks, 
notes  of  non-member  banks  or  their  customers,  secured  by 
Government  obligations,  for  the  purpose  of  obtaining 
funds  w^ith  which  to  purchase  United  States  bonds  or 
notes. 

4.  The  establishment  of  a  one-day  rate  of  from  two 
to  four  per  cent,  at  New  York  for  the  purpose  of  restoring 
to  the  market,  funds  temporarily  withdrawn  through  Gov- 
ernment loan  operations. 

31  Federal  Reserve  Bulletin,  June,  1917,  pp.  425-6. 

32  "  Fourth  Annual  Report  of  Federal  Reserve  Board,"  pp. 
5-6. 


146  WAR  BORROWING 

These  preferential  rates  have  been  from  time  to 
time  increased  with  the  progress  of  war  financing 
and  the  increase  of  the  interest  rate  upon  war  obU- 
gations.  But  the  general  principles  of  easy  redis- 
count and  preferential  rates  have  been  maintained. 
It  has  throughout  been  possible  for  member  banks 
to  obtain  without  net  cost  adequate  accommodations 
for  themselves,  and  for  non-member  banks  acting 
through  them,  by  the  discount  of  paper  collateralled 
by  certificates  of  indebtedness  or  by  Liberty  bonds, 
and  for  customers  to  obtain  similar  accommodations 
from  member  banks  on  approximately  the  same 
terms  as  those  granted  by  the  Reserve  Banks  to  the 
member  banks. 

This  stabilizing  effect  has  been  further  extended. 
Since  the  entry  of  the  United  States  into  the  war 
the  deliberate  policy  of  the  Federal  Reserve  Board 
has  been  to  adjust  its  rates  of  discount  to  the  rates 
of  interest  fixed  by  the  Treasury  for  certificates  of 
indebtedness  and  Liberty  Loan  bonds,  and  thereby 
"  to  keep  rates  of  rediscount  probably  considerably 
lower  than  they  would  otherwise  have  been,  and 
also  to  commit  the  system  to  the  maintenance  of 
rates  which  would  otherwise  have  been  altered  from 
time  to  time,  as  circumstances  seemed  to  require." 
In  order  to  attain  the  restrictive  effect  upon  credit 
expansion  thus  partially  lost  by  reason  of  the 
adoption  of  a  system  of  stable  rates  correspond- 
ing to  the  rates  borne  by  government  war  obliga- 
tions, the  Federal  Reserve  Board  has  resorted  to 
various  expedients  for  "  the  rationing  of  credit  " — 
refusal  of  credit  to  non-essential  industries,  restric- 
tion of  credit  to  enterprises  employing  it  for  capital 


THE  MONEY  MARKET  147 

accommodations,  and  reduction  of  capital  require- 
ments through  restrictions  imposed  in  cooperation 
with  the  War  Industries  Board  upon  supplies  of 
fuel,  material,  labor  power  and  transportation,^^ 

The  rediscount  facilities,  so  provided,  were  suffi- 
cient to  remove  all  possibility  of  banking  disturb- 
ance or  monetary  dislocation  in  connection  with  the 
withdrawal  of  government  deposits  traceable  to  cer- 
tificate borrowing.  Such  deposits  represented  the 
purchase  by  the  banks  of  certificates,  and  were  repre- 
sented to  a  large  extent  by  the  presence  in  the 
banks'  portfolios  of  government  obligations  — 
available  by  ready  and  economical  hypothecation 
with  the  Federal  Reserve  Banks  for  the  creation  of 
credit  balances  against  which  these  very  with- 
drawals might  be  charged.  In  other  words,  the 
banks'  government  deposit  liabilities  on  account  of 
certificate  borrowing  could  be  at  any  time  met  by  the 
creation  of  credit  balances  with  its  Federal  Reserve 
Bank  through  rediscount  of  the  evidence  of  such 
borrowing. 

The  question  has  been  very  acutely  raised  whether 
this  stability  has  not  been  gained  at  too  heavy  a 
cost  to  the  general  banking  situation.  By  encour- 
aging Banks  to  transfer  their  war  paper  to  the  Re- 
serve Banks  and  by  tempting  the  business  community 
to  use  war  paper  as  a  basis  of  commercial  loans 
there  has  been  a  concentration  of  war  paper  in  the 
hands  of  Reserve  Banks,  leaving  the  liquid  paper  in 
the  portfolios  of  the  member  banks.     The  tentative 

83  Prof.  H.  Parker  Willis,  "  Memorandum  Prepared  for  the 
Committee  on  War  Finance  of  the  American  Economic  Asso- 
ciation "    (MS.). 


148  WAR  BORROWING 

conclusion  arrived  at  by  the  most  competent  student 
of  the  subject  has  been  that  "  while  the  policy  of 
rationing  is  effective  and  probably  has  a  more 
universal  and  effective  influence  than  the  mere 
raising  of  rates  of  discount,  it  is  probable  that  a 
more  rapid  advance  in  rates  conservatively  handled 
would  have  exerted  a  desirable  effect."  ^"* 

Here  again,  however,  it  seems  necessary  in  the 
present  connection  to  confine  our  attention  to  the 
task  immediately  at  hand  and,  waiving  the  problem 
of  wider  consequence,  to  recognize  that  the  direct 
and  immediate  effect  of  the  discount  policy  of  the 
Federal  Reserve  Board  has  been  to  reduce,  if  not  to 
avert,  the  monetary  strain,  normally  incident  to  cer- 
tificate borrowing.' 

The  operations  outlined  above  have  been  reflected 
in  the  course  of  the  discount  operations  of  the 
Federal  Reserve  Banks  and  more  specifically  in  the 
course  of  such  Banks'  holdings  of  member  and  non- 
member  banks,  collateral  notes  secured  by  Liberty 
bonds  or  Treasury  certificates  of  indebtedness, 
and  of  rediscounted  customers'  paper  likewise 
secured. 

In  the  first  stage  —  certificate  buying  —  the  gen- 
eral use  of  payment  by  credit  made  it  possible  for  de- 
positary banks  to  acquire  certificates  without  strain 
upon  their  ordinary  resources  for  their  own  account 
and  for  their  customers,  as  well  as  for  non-member 
banks.  To  the  extent  that  interior  banks  made  pay- 
ment by  drafts  on  the  reserve  city  banks,  or  to 
the  extent  that  depositary  or  other  banks  or  indi- 
34  Prof.  H.  Parker  Willis,  "  Memorandum." 


THE  MONEY  MARKET  149 

viduals  elected  to  make  direct  payment  there  was 
reduction  or  depletion  of  reserves.  But  easy 
remedy  lay  in  recourse  to  the  Federal  Reserve  Banks 
for  discounts  or  advances. 

In  the  second  stage  —  government  withdrawals 
and  Liberty  Loan  flotations  —  the  outright  reduc- 
tion in  consequence  of  such  withdrawals  of  balances 
with  the  Federal  Reserve  Banks  kept  by  the  depos- 
itary banks  as  reserves  and  excess  reserves,  and  the 
subsequent  transformation  of  "  government  de- 
posits free  of  reserves,  into  individual  reserves,  re- 
quiring reserves  " —  induced  similar,  though  per- 
haps prompter  and  larger  recourse  to  the  Federal 
Reserve  Banks  for  the  repair  of  balances  and  re- 
serves by  the  discount  of  member  banks'  notes 
secured  by  Liberty  bonds  and  certificates  of  in- 
debtedness, and  to  a  minor  extent  by  the  rediscount 
of  customers'  paper  likewise  secured. 

In  the  following  table  are  shown  the  course  of  the 
discount  operations  of  the  Federal  Reserve  Banks, 
as  well  as  the  relative  importance  of  the  Banks'  hold- 
ings of  war  paper  during  the  period  studied. 

The  obvious  disclosure  of  the  detailed  exhibit  is 
the  increasing  extent  to  which  the  member  banks 
have  availed  themselves  of  the  discount  facilities  of 
the  Federal  Reserve  Banks  —  evidenced  by  the  num- 
ber of  banks  accommodated  through  discounts  and 
rediscounts  during  each  month  since  our  entry  into 
the  war.  Starting  with  384  discounting  members 
in  April,  19 17,  the  number  rose  to  900  in  June,  19 17, 
to  1574  in  November,  19 17,  to  2693  in  May,  19 18, 
to  3462  in  July,  19 18,  to  3671  in  August,  19 18. 
This  increase  has  been  rhythmical  rather  than  uni- 


ISO 


WAR  BORROWING 


Total 

Total 

Ratio 

Total 

Ratio 

Number 

bills 

war 

of  war 

bills 

of  war 

of  banks 

dis- 

paper 

paper 

dis- 

paper 

discount- 

counted 

to 

counted 

to  total 

ing 

during 

total 

on  last 

bills  on 

month 

bills 

Friday 
of  month 

last 
Friday 

I9I7 

(millions 

0 

April 

50.0 

35-0 

384 

May 

91.4 

5-1 

■■5'.6 

49-5 

590 

June 

750.2 

354-0 

47.2 

197.2 

12.9 

900 

July 

460.7 

192.6 

41.8 

138.4 

9-6 

960 

Aug. 

220.8 

30.4 

13.8 

147-3 

10.7 

990 

Sept. 

548.1 

215-6 

39-3 

233.5 

28.2 

946 

Oct. 

2681. 1 

2262.4 

&4-4 

397.0 

52.6 

1 170 

Nov. 

3206.4 

2585.6 

80.6 

756.3 

66 

1574 

Dec. 

892.2 

238.8 

26.8 

680.7 

43 

1 701 

Jan. 

3 

868.4 

392-0 

45-1 

627.6 

50 

1432 

Feb. 

762.4 

399-1 

52 

509.5 

53 

1353 

Mar. 

759-1 

307-6 

40.5 

583.2 

52 

1568 

April 

2178.4 

1811.4 

83.2 

901.7 

70.9 

2100 

May 

3002.8 

2517-0 

83.8  35 

896.4 

62.8 

2693 

June 

3161.9 

2621.4 

82.9 

869.2 

48.8 

3021 

July 

3343-4 

2469.4 

73-9 

1 302. 1 

52.2 

3462 

Aug. 

3762.3 

3127.4 

83-1 

1 428. 1 

62.7 

3671 

Sept. 

4685.1 

4079.6 

87.1 

1713-4 

71.2 

3464 

Oct. 

5903-9 

5308.8 

89-9 

1 546. 1 

70.9 

3610 

form.  The  Loan  flotation  months  have  witnessed 
the  largest  recourse  to  the  Reserve  Banks ;  the  cer- 
tificate borrowing  months,  a  smaller  but  nevertheless 
considerable  use  thereof,  and  the  interim  months 
either  an  approximation  to  stability  or  outright  re- 
duction. The  sequence  has  thus  been  as  follows : 
During  each  period  of  anticipatory  borrowing  the 
number  of  discounting  members  has  increased,  the 
movement  culminating  in   extraordinary  resort  to 

35  84.8  in  Federal  Reserve  Bulletin. 


THE  MONEY  MARKET  151 

the  Reserve  Banks  in  connection  with  each  Loan 
flotation.  Thereafter  the  number  of  discounting 
banks  has  first  decHned  and  then  tended  to  stabiHty 
until  the  resumption  of  certificate  borrowing  has  re- 
newed the  cycle.  The  whole  movement  has  been 
cumulative  and  progressive,  both  in  absolute  addi- 
tion and  in  relation  to  the  total  membership  of  the 
Federal  Reserve  System. 

The  discount  operations  of  the  Federal  Reserve 
Banks  reflect  the  same  movement  with  even  greater 
clearness.  The  volume  of  bills  discounted  which 
for  the  first  three  months  of  191 7  showed  a  monthly 
aggregate  of  22  millions  rose  in  April  to  50  millions 
and  in  May  to  91  millions.  With  the  flotation  of 
the  First  Liberty  Loan  there  was  precipitate  increase 
in  June  to  750  millions.  During  July  and  August 
—  with  the  maturing  of  outstanding  certificate 
issues,  the  influx  of  Liberty  Loan  payments,  and  the 
progress  of  public  expenditures  —  the  member 
banks  liquidated  their  indebtedness  rapidly  so  that 
the  volume  of  bills  discounted  for  member  banks 
and  other  Federal  Reserve  Banks  dropped  again 
to  where  it  had  been  before  the  loan  flotation. 
Upon  the  resumption  of  certificate  borrowing  and 
the  withdrawal  of  government  deposits  in  August 
and  September  the  process  of  expansion  was  again 
renewed.  Gaining  rapidly  in  intensity  in  October 
with  the  flotation  of  the  Second  Liberty  Loan  a 
climax  was  reached  in  November,  after  which  the 
recurrent  liquidation  set  in.  This  liquidation  pro- 
ceeded more  slowly  from  December  on,  and  in  Feb- 
ruary was  practically  overtaken  by  renewed  creation 
of  war  paper  —  a  condition  which  continued  through 


152  WAR  BORROWING 

March  and  into  April.  Towards  the  end  of  April, 
the  Banks'  actual  holding  of  bills  discounted  in  im- 
mediate preparation  for  the  Third  Liberty  Loan, 
rose  above  the  900  million  point,  and  it  remained 
substantially  around  that  amount  through  May  and 
June.  With  certificate  borrowing  resumed  on  a 
larger  scale  in  anticipation  of  the  Fourth  Liberty 
Loan  very  much  higher  levels  were  attained  in  June, 
July  and  August,  culminating  in  mid-October  and 
followed  by  materially  less  liquidation  than  in  earlier 
cycles. 

In  the  remarkable  growth  of  discount  operations, 
"  war  paper  " —  member  banks'  notes  secured  by 
Liberty  bonds  and  certificates  of  indebtedness,  and 
customers'  paper  similarly  secured  —  have  played 
the  all  important  part.  Not  only  has  the  relative 
importance  of  war  paper  increased  with  the  later 
progress  of  our  war  financing,  but  the  net  liquida- 
tion of  such  bills  has  been  sensibly  less.  During  the 
loan  flotation  months  there  has  been  related  rather 
than  sympathetic  increase  in  the  volume  of  dis- 
counted bills  secured  other  than  by  war  obligations. 
But  aside  from  this,  the  movement  of  discounts 
traceable  to  commercial  expansion  has  been  within 
narrow  range. 

The  preponderant  part  which  war  paper  has  come 
to  play  in  the  discount  operations  of  the  Federal 
Reserve  Banks,  and  the  absolute  volume  of  such 
paper  now  resting  in  the  Banks'  portfolios  are  facts 
of  the  gravest  importance  in  the  nation's  financial 
present  as  well  as  in  its  economic  future.  But 
tempting  as  are  these  aspects  of  the  situation,  their 
consideration  extends  beyond  the  scope  of  the  im- 


THE  MONEY  MARKET  153 

mediate  inquiry.  The  two  conclusions  with  which 
our  present  concern  lies  are :  ( i )  the  discount  ap- 
paratus of  the  Federal  Reserve  Banks  has  effectively 
relieved  the  money  market  from  strain  during  the 
period  of  war  borrowing.  The  price  paid  for  some 
measure  of  this  relief  may  hereafter  appear  to  have 
'been  excessive,  but  that  it  has  been  afforded  is  in- 
dubitable. (2)  The  equilibratory  apparatus  has 
not  been  organically  related  to  certificate  borrowing. 
Used  in  conjunction  therewith  the  result  has  been  an 
extraordinary  freedom  from  monetary  disturbance. 
But  the  stabilizing  effect  is  imputable  to  the  credit 
mechanism  and  not  to  the  borrowing  device.  The 
same  arrangements  might  have  been  used,  with 
slight  change  and  presumably  with  like  success,  in 
connection  with  ordinary  funding  operations. 


THE  PRICE  LEVEL 


V 

THE  PRICE  LEVEL 

The  relation  of  certificates  of  indebtedness  to  the 
price  level  is  an  aspect  of  the  larger  question  of  the 
effect  of  war  borrowing  upon  economic  and  social 
well  being.  Even  before  our  entry  into  the  war  this 
consideration  had  been  much  to  the  fore  in  fiscal  dis- 
cussion in  this  country  and  abroad,  in  connection 
with  the  outright  disfavor  of  funding  and  the  vigor- 
ous advocacy  of  an  "  all  tax  "  policy  in  war  financ- 
ing, on  the  score  that  war  loans  make  inevitably  for 
inflation  and  rising  prices. 

It  is  possible  to  trace  with  some  exactness  the 
growth  of  the  doctrine  that  war  loans  cause  in- 
flation.^ Without  returning  to  shadowy  beginnings, 
the  first  explicit  phrasing  of  the  argument  appears  to 
have  been  made  in  1915-1916  by  an  English  econ- 
omist of  note,  Mr.  A.  C.  Pigou,  professor  of  polit- 
ical economy  in  the  University  of  Cambridge  in  two 
public  lectures  delivered  in  Cambridge,  in  articles 
contributed  to  the  Contemporary  Review  and,  more 
formally,  in  the  little  book  on  "  The  Economy  and 
Finance  of  the  War," 

^  See  a  paper  by  the  writer  "  Do  Government  Loans  Cause 
Inflation?  "  (in  Annals  of  American  Academy  of  Political  and 
Social  Science,  January,  1918),  from  which  the  succeeding 
paragraphs  are  taken. 

157 


158  WAR  BORROWING 

The  preface  of  Pigou's  book  is  dated  October, 
1916.  In  December,  1916,  at  the  meeting  of  the 
American  Economic  Association  held  in  Columbus, 
Ohio,  an  eminent  American  economist,  Professor 
O.  M.  W.  Sprague  of  Harvard  University,  pre- 
sented a  paper  on  "  Loans  and  Taxes  in  War 
Finance  "  wherein  quite  independent  of  Pigou's  ex- 
position the  inflationist  argument  against  funding, 
foreshadowed  in  certain  of  the  speaker's  earlier 
writings,  was  set  forth  in  detail.  Admitting  that 
"  it  is  not  absolutely  inevitable  that  war  finance 
based  on  borrowing  should  cause  a  general  rise  in 
prices,"  Professor  Sprague  noted  that  "  it  is  signifi- 
cant, however,  that  whenever  governments  have  re- 
sorted to  this  policy  prices  generally  have  manifested 
marked  and  continued  upward  tendency." 

Professor  Pigou's  and  Professor  Sprague's  views, 
spoken  with  some  measure  of  scientific  restraint, 
were  received  with  attention  if  not  assent  within 
expert  circles.  They  were  given  circulation  and 
vogue  by  the  lamentable  Minnesota  '*  memorial  of 
American  economists  to  Congress  regarding  war  fin- 
ance," an  ill-fated  attempt  to  determine  congres- 
sional action  upon  the  then  pending  war  revenue  bill 
by  arraying  the  body  of  academic  economists  in 
support  of  such  propositions  as  : 

"  It  may  be  necessary  for  a  month  or  two  at  the  outset 
to  issue  a  limited  amount  of  bonds,  pending  the  collection 
of  increased  taxes,  but  beyond  these,  which  might  well  be 
made  repayable  within  a  year,  no  necessity  for  bonds 
exists." 

Thus  far  the  inflationist  doctrine  had  circulated 
as  an  academic  hypothesis.     In  April,  19 17,  it  was 


THE  PRICE  LEVEL  159 

unexpectedly  translated  into  the  higher  altitude  of 
state  policy  by  a  sentence  of  President  Wilson's 
message  to  the  special  session  of  Congress : 

"  It  is  our  duty,  I  most  respectfully  urge,  to  protect  our 
people  so  far  as  we  may  against  the  very  serious  hardships 
and  evils  which  would  be  likely  to  arise  out  of  the  infla- 
tion which  would  be  produced  by  vast  loans." 

In  the  nineteen  months  of  our  active  participation 
in  the  war  the  inflation  argument  has  undergone  two 
interesting  developments.  In  the  first  place,  the 
argument  has  come  to  be  used  less  in  outright  re- 
sistance to  funding  in  war  finance,  of  any  kind 
and  to  whatever  extent,  but  has  been  employed  in 
much  more  rational  way  in  restraint  of  an  exclusive 
or  disproportionate  reliance  upon  funding  and  a  cor- 
responding avoidance  or  insufficient  use  of  taxation. 

In  the  second  place,  careful  thought  has  made 
clear  that  inflation  may  easily  but  need  not  inevitably 
result  from  war-time  borrowing,  and  cautious 
analysis  has  sought  to  establish  the  essential  distinc- 
tion. The  actual  process  has  'been  stibjected  to 
searching  examination,  and  the  following  con- 
clusions may  be  said  to  represent  the  present  con- 
sensus of  deliberate  economic  opinion :  - 

To  the  extent  that  loans  are  made  ultimately  from 
uninvested  capital,  from  current  income,  from 
liquidated  investments,  or  from  current  and  future 
savings  there  need  be  no  inflation.  To  the  extent 
that  loans  are  made  by  banks  for  their  own  account 

2  See  Professor  W.  A.  Scott's  able  paper  "  Bond  Issues  and 
the  Money  Market "  in  "  Financial  Mobilization  for  War " 
(Chicago,  191 7). 


i6o  WAR  BORROWING 

by  credit  creation,  or  by  individuals  through  bank 
loans  in  the  nature  of  long  time  engagements  rather 
than  of  installment  purchases  —  inflation  may  re- 
sult. The  actual  proportion  of  such  non-inflating 
"  savings  loans  "  to  the  class  of  potentially  inflating 
"  credit  loans  "  is  in  the  war  funding  experience  of 
the  belligerent  states  undetermined.  But  whatever 
it  be,  there  is  no  fixity  attached  and  financial  policy 
exercised  through  banking  control  can  reduce  the 
relative  and  even  the  absolute  importance  of  in- 
flation-causing borrowing.  That  an  unwisely 
directed  borrowing  policy  may  take  the  form  of 
"  credit  loans  "  is  no  reason  why  borrowing  as  a 
measure  of  war  finance  must  be  denounced  lock, 
stock  and  barrel  as  inflationist  in  effect.  The 
obvious  alternative  is,  having  first  determined  to 
what  extent  recourse  shall  or  must  be  had  to  loans 
in  a  war  programme,  to  plan  such  borrowing  de- 
vices as  will  draw  upon  the  fund  of  present  and  the 
source  of  future  savings,  without  recourse  to  credit 
expansion. 

All  the  foregoing  is  predicated  upon  the  assump- 
tion that  the  war  borrowing  availed  of  is  direct  and 
final  —  in  the  nature  of  debt  obligations,  whether 
long-term  bonds  or  short-term  notes,  emitted  by  the 
state  and  purchased  forthwith  by  investing  citizens 
and  banks.  If  payment  be  made  for  such  obliga- 
tions directly  or  indirectly  from  out  of  loan-created 
deposit  accounts,  inflation  may  be  expected  to  result. 
If  payment  be  made  out  of  current  savings  or  out  of 
existing  deposit  accounts  without  corresponding 
credit  expansion  in  other  quarters,  there  would  seem 
to  be  no  necessity  for  such  inflation. 


THE  PRICE  LEVEL  i6i 

The  current  war  loans  of  the  United  States  have 
been  neither  as  simple  nor  as  direct  as  the  above,  and 
this  in  consequence  of  the  use  of  certificates  of  in- 
debtedness. The  Treasury  has  been  supplied  in  the 
first  instance  by  anticipatory  borrowings  in  the  main 
from  the  banks  and  to  a  limited  extent  from  in- 
vestors, and  such  temporary  obligations  have  at  in- 
tervals been  liquidated  out  of  or  funded  into  issues 
of  long  term  bonds  bought  in  the  course  of  intensive 
flotation  campaigns  by  investing  citizens  and  banks. 
This  procedure  —  conveniently  described  with  re- 
spect to  its  dominant  feature  as  "  certificate  borrow- 
ing " —  presents  much  more  complex  possibilities  as 
to  resultant  inflation.  The  certificates  of  indebted- 
ness may  be  paid  for  from  out  of  savings  or  from 
out  of  loans,  and  the  same  alternatives  exist  with  re- 
spect to  the  bond  issues  by  which  or  from  the  pro- 
ceeds of  which  the  certificates  are  eventually  extin- 
guished. In  short,  new  variables  enter  into  play  and 
the  outcome  becomes  more  than  ever  dependent  upon 
elected  policies.  The  conclusions  which  might  be 
expected  to  result  from  these  more  intricate  con- 
ditions might  be  summarized  briefly  as  follows :  If 
the  certificates  are  taken  over  by  the  banks  and  by 
investors  without  the  creation  of  additional  deposit 
currency,  and  if  the  funding  bond  issues  are  there- 
after subscribed  and  paid  for  from  out  of  savings, 
there  will  be  no  loan-created  inflation.  To  the 
extent  that  any  of  these  assumptions  are  unrealized, 
the  possibility  of  such  inflation  is  present. 

Before  passing  to  our  direct  concern  —  the  man- 
ner in  which,  if  at  all,  the  use  of  certificates  of  in- 


i62  WAR  BORROWING 

debtedness  has  brought  about  inflation  —  it  is  worth 
while  to  refer  to  the  current  unsettlement  of  opinion 
as  to  what  constitutes  inflation.  During  the  past 
two  years  there  has  raged  in  EngHsh  financial  cir- 
cles, technical  and  academic,  a  controversy  recalling 
in  variety  and  intensity  the  classic  bullion  debate  of 
a  century  ago,  not  only  as  to  whether  inflation  really 
existed  in  England,  whether  it  was  imputable 
wholly  or  in  any  part  to  public  borrowing  and 
whether  this  consequence  if  existent  was  avoidable 
or  inevitable  —  but  more  fundamentally  as  to  what 
inflation  really  is.  Seemingly  driven  to  scientific 
desperation  by  the  variety  of  current  meanings  at- 
taching to  the  word,  an  English  economist  of  note 
has  lately  declared  ^  "  there  is  obviously  much  to  be 
said  for  abandoning  the  term  inflation  altogether, 
and  so  dispensing  with  the  need  for  any  definition." 
Similarly  in  this  country.  The  old  fixity  of  con- 
cept and  definition  has  perceptibly  yielded,  more 
conspicuously  indeed  among  practical  financiers  and 
financial  administrators  than  among  academic  econ- 
omists. In  banking  circles  there  is  disposition  to 
view  the  matter  as  essentially  one  of  banking 
solvency,  and  to  maintain  that  ■*  **  the  test  of  in- 
flation in  the  credit  structure  is  the  relation  of  cash 
holdings  to  deposits."  So  too  it  is  perhaps  not 
without  significance  that  in  the  annual  report  ^  of  the 
Federal  Reserve  Board  the  term  "  expansion  "  has 

3  Pigou,  "  Inflation  "  in  The  Economic  Journal,  December, 
1917,  p.  490. 

■*  "  Is  There  Credit  Inflation  in  the  United  States?  ' ,  circular 
letter  of  Guaranty  Trust  Company  of  New  York,  March  4, 
1918. 

5  January  15,   1918. 


THE  PRICE  LEVEL  163 

completely  replaced  "  inflation  " —  without,  how- 
ever, in  any  wise  affecting  the  soundness  and 
sobriety  of  counsel  given  by  individual  members  of 
the  Board  in  public  addresses  and  in  semi-official 
reviews  of  the  financial  situation.*^ 

Fortunately,  it  is  not  requisite  for  our  purpose  to 
determine  this  question  of  terminology.  Our  con- 
cern lies  not  in  establishing  the  title  of  the  disorder 
but  in  ascertaining  its  presence  and  in  identifying  its 
cause.  To  debate  dialectically  as  to  what  constitutes 
inflation,  with  a  view  to  eventually  concluding  that 
that  which  we  have  is  or  is  not  inflation  —  is  to  drag 
a  red  herring  across  the  trail.  The  specific  problem 
before  us  is  to  ascertain  whether,  and  if  so  to  what 
extent,  war  borrowing  or  rather  a  particular  mode 
of  war  borrowing  is  the  direct  cause  of  rising  prices, 
a  phenomenon  which  in  accepted  philosophy 
will  follow,  other  things  being  equal,  an  in- 
crease in  the  circulating  medium.  There  is  indeed 
a  small  group  of  political  economists  and  practical 
financiers  who  deny  the  validity  of  the  quantity 
theory  of  money  upon  which  the  foregoing  state- 
ment rests,  and  to  these  the  analysis  upon  which  we 
are  about  to  enter  will  prove  unconvincing.  But  the 
consensus  of  opinion  has  long  been,  and  at  the 
present  time  more  than  ever  is  in  definite  affirmation 
of  the  doctrine  that  with  no  counteracting  increase 

8  Thus  Professor  A.  C.  Miller's  "  War  Finance  and  In- 
flation"  in  Annals  of  American  Academy  of  Political  and  So- 
cial Science,  January,  1918;  Mr.  Paul  Warburg's  "Appeal  for 
Thrift  to  Counteract  Increasing  Inflation  "  in  Federal  Trade 
Information  Service.  April  25,  1918;  and  the  repeated  editorial 
utterances  of  the  Federal  Rcseri'e  Bulletin  (see,  for  example, 
November,  1918,  pp.  1047-8). 


i64  WAR  BORROWING 

in  the  mass  of  commodities  or  in  the  frequency  of 
transfers  or  any  reduction  in  the  velocity  of  circula- 
tion, an  increase  in  the  volume  of  money  or  check- 
able deposits  over  a  theretofore  normal  supply  will 
be  followed  by  a  rise  in  general  prices."^ 

This  increase  in  the  circulating  medium  has  been 
called  inflation,  and  the  inquiry  has  been  phrased  as 
"  Do  government  loans  cause  inflation?  "  If,  how- 
ever, the  term  inflation  be  given  —  wisely  or  un- 
wisely —  an  altered  signification,  the  result  is  not  to 
change  the  quest  but  merely  its  title.  Instead  of 
seeking  to  determine  whether  war  borrowing  causes 
inflation,  we  should  undertake  to  ascertain  whether 
such  operations  bring  about  a  rise  in  general  prices 
—  it  being  understood  that  this  increase  is  the  con- 
sequence, other  things  being  equal,  of  an  increase  in 
the  volume  of  money  and  credit. 

The  monthly  index  numbers  of  wholesale  com- 
modity prices  and  of  retail  food  prices  in  the  United 
States  in  the  calendar  years  1915,  191 6,  1917  and 
19 1 8  as  compiled  by  the  U.  S.  Bureau  of  Labor  have 
been  as  follows : 

''  Thus  the  Federal  Reserve  Board  has  lately  defined  in- 
flation as  "  the  increase  of  current  purchasing  power,  whether 
in  the  form  of  actual  currency  or  in  the  form  of  credit  —  faster 
than  the  volume  of  available  goods"  (Federal  Reserve  Bulle- 
tin, November,  1918,  p.  1048).  With  this  compare  Professor 
Kemmerer's  succinct  statement :  "  Inflation  means  a  redun- 
dancy of  money  or  circulating  credit  or  both  that  results  in 
rising  prices.  It  occurs  when,  at  a  given  price  level,  a  coun- 
try's circulating  media  —  money  and  credit  instruments  of  ex- 
change—  increase  relatively  to  trade  needs."  ("Inflation  and 
the  Government  Fisc,"  prepared  for  Committee  on  War  Fi- 
nance of  American  Economic  Association ;  see  also  "  Infla- 
tion "  in  American  Economic  Review,  June,  1918.) 


THE  PRICE  LEVEL  165 

Month  Wholesale       Retail  Food 

191S—  [1913  =  100] 

January    98  103 

February    100  lOi 

March  99  98 

April   99  99 

May  100  loo 

June    99  100 

July   loi  100 

August    100  100 

September    98  lOl 

October    loi  103 

November    102  104 

December    105  105 

1916  — 

January    no       •  107 

February    in  106 

March     114  107 

April   116  109 

May    118  109 

June    118  1 12 

July  119  III 

August    123  113 

September  127  118 

October    133  121 

November    143  126 

December     146  126 

1917  — 

January    150  128 

February    155  133 

March     160  133 

April    171  14s 

May    181  151 

June    184  152 

July   18s  146 

August    184  149 

September    182  153 

October    180  157 

November    182  155 

December    181  157 


1 66  WAR  BORROWING 

Month  Wholesale        Retail  Food 

1918 —  [1913=  100] 

January    185  160 

February    187  161 

March     188  154 

April   191  154 

May     191  158 

June    193  162 

July    198  167 

August     202  171 

September     207  ^  178 

It  appears  from  the  above  that  wholesale  prices 
began  to  rise  in  the  mid-summer  of  191 5,  that  the 
upward  movement  continued  steadily  through  the 
first  six  months  of  19 16,  that  thereafter  it  proceeded 
with  great  violence  until  the  summer  of  19 17  when, 
after  a  period  of  stability  tending  to  slight  recession, 
the  upward  tendency  resumed  early  in  19 18  and 
thereafter  developed  with  increasing  momentum. 
In  the  case  of  retail  prices  there  has  been  the  cus- 
tomary "  lag."  The  earlier,  more  gradual  rise  con- 
tinued through  the  autumn  of  19 16,  the  sharp  up- 
ward movement  extended  for  some  months  beyond 
the  mid-summer  of  the  same  year,  and  the  period 
of  comparative  stability  and  recession  continued 
through  the  early  spring  of  1918. 

Concentrating  attention  upon  that  period  of  our 
war  borrowing  for  which  data  are  at  this  time  avail- 
able—  May,  1917,  through  September,  1918  —  it 
appears  that  for  the  first  seven  months  (May-De- 
cember, 191 7)  wholesale  prices  were  subject  to  nar- 
row fluctuations  and  underwent  no  eventual  change, 
and  for  the  second  nine  months  (December,  IQ17 — r 

8  Preliminary. 


THE  PRICE  LEVEL  167 

September,  1918)  prices  rose  —  on  the  whole,  with 
but  slight  arrest  and  with  respect  to  the  entire  in- 
terval with  considerable  precipitancy.  As  to  retail 
prices,  the  stable  period  began  later  (October, 
191 7)  and  continued  later  (April,  19 18). 

The  facts  that  we  are  accordingly  called  upon  to 
interpret  are  that  in  so  far  as  reliance  is  to  be  put 
upon  the  validity  of  the  Bureau  of  Labor  index 
number,  ( i )  commodity  prices  remained  relatively 
stable  during  something  less  than  the  first  half  of 
our  war  borrowing  period  and  (2)  such  prices  ad- 
vanced sharply  during  something  more  than  the 
second  half.  Phrased  somewhat  differently,  prices 
did  not  rise  in  the  seven  months  from  the  first  issue 
of  certificates  in  anticipation  of  the  First  Liberty 
Loan  to  the  resumption  of  certificate  borrowing  in 
anticipation  of  the  Third  Liberty  Loan;  and  on  the 
other  hand,  prices  did  rise  materially  in  the  succeed- 
ing nine  months  from  such  resumption  through  the 
certificate  borrowing  in  anticipation  of  the  Fourth 
Liberty  Loan.^ 

( I )  It  would  be  unwarranted  to  draw  any  con- 
clusion as  to  the  effect  of  war  borrowing  upon  gen- 
eral prices  from  the  failure  of  prices  to  advance  in 
the  seven  months  within  which  occurred  the  ten  cer- 
tificate issues  in  anticipation  of  the  First  and  Second 
Liberty  Loans,  as  well  as  the  actual  flotation  of  the 
Loans.  It  is  generally  agreed  that  such  an  advance 
may  be  expected  —  other  things  remaining  un- 
changed —  to  follow  any  large  increase  in  the  supply 
of  money  and  credit.  But  even  among  the  strictest 
adherents  of  the  quantity  theory  of  money,  there  is 

^  See  p.  60  above. 


i68  WAR  BORROWING 

no  common  opinion  as  to  the  period  of  time  which 
must  elapse  before  the  effect  of  an  increase  in  the 
volume  of  currency  becomes  apparent  in  rising 
prices.  A  recent  study  ^"^  of  English  experience  in 
this  particular  made  by  Professor  J.  Shield  Nichol- 
son of  the  University  of  Edinburgh  led  to  the  con- 
clusion that  the  period  in  which  the  increase  in  cur- 
rency worked  itself  out  in  higher  prices  —  happily 
described  as  "  the  period  of  incubation  "  was  about 
five  months.  A  similar  analysis  ^^  of  Canadian  ex- 
perience by  Mr.  W.  C.  Clark  of  Kingston,  Ontario, 
established  the  period  of  incubation  for  that  country 
to  be  six  months  —  a  difference  "  one  would  expect 
in  a  country  less  densely  populated  and  less  highly 
industrialized,  as  Canada  is."  For  the  United 
States,  Professor  Irving  Fisher,  examining  the  fig- 
ures up  to  the  time  of  our  entry  into  the  war,  finds 
that  after  the  middle  of  1915  "a  change  in  price 
level  follows  a  change  in  total  money  after  a  lag  of 
about  two  months,"  ^-  and  in  a  later  resume  this  is 
restated  as  "  a  lag  in  this  country  of  less  than  two 
months."  ^^ 

It  is  not  unlikely  that  as  fuller  data  become  avail- 
able Professor  Fisher's  computation  will  indicate  a 
longer  lag  than  the  original  estimate,  as  did  appar- 

1°  "  Statistical  Aspects  of  Inflation  "  in  Journal  of  the  Royal 
Statistical  Society,  July,  1917. 

11  Clark,  "  Inflation  and  Prices  "  in  Journal  of  the  Canadian 
Bankers'  Association,  January,  1918. 

12  "  The  Equation  of  Exchange  for  1916"  in  American  Eco- 
nomic Revieiv,  December,  191 7,  p.  937. 

13  "  Some  Contributions  of  the  War  to  our  Knowledge  of 
Money  and  Prices"  (abstract)  in  American  Economic  Retnew, 
Supplement,  March,  1918,  p.  258. 


THE  PRICE  LEVEL  169 

ently  Professor  Nicholson's.^"*  Both  theoretical  ex- 
position and  inductive  verification  of  the  quantity 
theory  of  money  have  been  largely  concerned  with 
what  might  be  described  as  progressive  movements, 
that  is  to  say,  with  long  time  periods  in  which  the 
volume  of  credit  or  currency  increased  in  the  one 
case  or  diminished  in  the  other  —  not,  it  is  true,  at 
uniform  pace  but  without  recurrent  reversal.  But 
in  connection  with  certificate  borrowing,  we  have  to 
do  with  at  least  the  possibility  of  a  rhythmical  short- 
time  movement  —  an  expansion  of  credit  during  the 
period  in  which  government  deposits  created  by 
credit-paid  certificate  issues  are  liberated  by  public 
expenditure,  and  a  possible  contraction  of  credit 
during  the  period  in  which  credits  so  dispersed  are 
applied  to  the  reduction  of  commercial  loans  and 
eventually  absorbed  in  reserves  or  investments. 
The  question  thus  arises  —  not  heretofore  discussed, 
so  far  as  the  present  writer  is  aware  —  how  long  a 
period  of  currency  inflation  is  necessary  to  produce 
a  corresponding  rise  in  prices.  Reverting  to  useful 
medical  parallelism,  allowance  must  be  made  for  a 
"  period  of  exposure  "  or  even  a  "  period  of  in- 
vasion "  which  precedes  the  "  period  of  incubation." 
If  it  be  assumed  that  since  our  entry  upon  a  re- 
gime of  active  war  financing  the  period  of  incubation 
in  the  United  States  has  been  at  least  as  long  in  the 
United  States  as  that  in  England,  the  relative  stabil- 
ity of  prices  for  the  first  seven  months  would  seem 
to  be  in  a  measure  accounted  for.     It  is  reasonable  to 

^*  Compare  American  Economic  Review,  December,  1917,  p. 
938,  with  Journal  of  the  Royal  Statistical  Society,  July,  1917,  p. 
487. 


lyo  WAR  BORROWING 

infer  that  any  process  of  currency  expansion  directly 
associated  with  the  issue  of  certificates  of  indebted- 
ness would  begin  to  operate  with  the  completion  of 
payments  by  subscribing  banks.  Upon  this  basis, 
the  assumption  of  a  five  months  period  of  incubation 
would  lead  us  to  expect  that  any  such  effect  exerted 
upon  the  price  level  by  the  certificates  issued  in  an- 
ticipation of  the  First  Liberty  Loan  would  not  have 
become  apparent  before  December,  19 17,  and  that 
any  such  effect  exerted  by  succeeding  issues  of  cer- 
tificates would  not  have  become  apparent  until 
thereafter. 

But  there  is  a  further  reason,  although  of  a  very 
different  kind,  why  the  possible  price  raising  effect 
of  an  increase  in  the  volume  of  money  should  not  be 
apparent  in  a  rising  index  number  during  the  first 
seven  months  of  our  war  borrowing  even  though  the 
period  of  incubation  were  less  than  that  assumed. 
Under  the  stress  of  war  conditions  the  United  States 
has  pursued  to  an  increasing  extent  the  policy  of  fix- 
ing by  statute  and  by  administrative  order  or  of 
otherwise  influencing  or  determining  the  maximum 
prices  which  may  be  paid  for  a  large  body  of  com- 
modities, a  considerable  number  of  which  figure  in 
the  computation  of  the  index  number. 

The  price-fixing  activities  of  the  United  States 
Government  began  practically  with  the  passage  in 
August,  191 7,  of  the  Food  and  Fuel  Act.^^ 
Through  the  powers  conferred  by  this  law  upon  the 

1^  For  the  following  particulars  I  am  indebted  to  a  memor- 
andum prepared  by  Dr.  Leo  Wolman  of  the  Johns  Hopkins 
University,  at  present  associated  with  the  Price  Section,  Di- 
vision of  Planning  and  Statistics,  of  the  War  Industries  Board, 


THE  PRICE  LEVEL  171 

President  and  delegated  by  him  to  the  Food  and  Fuel 
Administrations,  the  prices  of  basic  foods  and  of 
coal  fell  under  regulation  at  the  close  of  August, 
1917.  By  presidential  proclamation  on  August  23, 
1917,  the  price  of  bituminous  coal  was  fixed,  and  by 
a  similar  proclamation  issued  August  30,  19 17,  the 
price  of  wheat  was  regulated.  With  the  increase  in 
the  military  program  and  a  corresponding  increase 
in  the  volume  of  government  purchases,  the  neces- 
sity of  a  more  general  control  of  prices  soon  became 
apparent.  From  September,  19 17,  to  the  summer 
of  19 1 8,  the  list  of  price-controlled  commodities  was 
extended  to  include  most  of  the  basic  materials  of  in- 
dustry, with  the  exception  of  raw  cotton.  The 
prices  of  copper  and  iron  and  steel  were  fixed  in 
September,  1917;  wood  chemicals  and  timbers  in 
December;  zinc  in  February,  1918;  aluminum  in 
March ;  rubber,  hides  and  skins,  and  wool  in  May. 

The  presence  of  price-fixed  commodities  among 
the  index  number  commodities  obviously  tends  to  in- 
validate the  reliability  of  the  index  number  as  typi- 
cal of  the  general  price-movement  and  thus  to  ob- 
scure the  price-changing  effect  of  alteration  in  any 
of  the  magnitudes  that  enter  into  the  equation  of  ex- 
change. If  the  proportion  of  price-fixed  commod- 
ities in  the  index-number  table  is  relatively  greater 
in  number  or  weight  than  the  proportion  of  price- 
fixed  commodities  relative  to  all  commodities,  the 
index-number  will  show  a  smaller  rise  than  general 
prices  have  suffered. 

The  influence  of  price  fixing  upon  the  movement 
of  commodity  prices  has  recently  been  studied  by 
the  Price  Section,  Division  of  Planning  and  Sta- 


172  WAR  BORROWING 

tistics  of  the  War  Industries  Board,  with  preHminary 
results  of  the  utmost  significance.^*^ 

Of  the  271  commodities  used  in  the  study  as 
representing  the  commodities  figuring  in  the  Bureau 
of  Labor  Statistics  index  number  of  wholesale 
prices,  78  of  the  series  are  for  commodities  which 
by  September,  19 18,  had  come  under  price  control. 
The  relative  prices,  weighted  and  combined,  of  the 
controlled  commodities  as  compared  with  (a)  the 
uncontrolled  and  (b)  both  controlled  and  uncon- 
trolled commodities  are  shown  in  the  following  table. 
Prices  during  the  twelve  months  before  price-fixing 
began  (August,  19 16,  to  July,  191 7)  are  taken  as 
a  base  from  which  to  measure  the  relative  changes. 

1917  Controlled     Uncontrolled  All 

May    122  113  117 

June    123  116  119 

July    123  117  119 

Aug 119  118  119 

Sept Ill  121  117 

Oct 103  125  116 

Nov 104  127  117 

Dec 104  126  116 

So  analyzed,  the  seeming  stability  of  the  Bureau 
of  Labor  index  number  during  the  first  period  of 
our  war  borrowing  resolves  itself  very  largely  into 
the  masking  effect  of  price  control.  The  result  of 
such  control  was  not  merely  to  prevent  any  rise  in 
the  prices  of  the  commodities  involved,  but  actually 
to  effect  a  material  reduction  —  enough  at  least  to 
counterbalance  the  upward  movement  of  the  uncon- 

i"  Bulletin  No.  10  (December,  1918)  on  "  Fluctuations  of 
Controlled  and  Uncontrolled  Prices,"  prepared  by  Dr.  W.  W. 
Stewart. 


THE  PRICE  LEVEL  173 

trolled  group,  and  to  leave  the  combined  price  of 
"  all  commodities  "  practically  stationary.  It  is 
true  that  this  method  of  comparison,  "  in  order  to 
make  continuous  series  of  index  numbers  which  are 
comparable,  necessarily  treats  some  commodities  as 
controlled  before  they  were  actually  under  control." 
But  allowance  for  this  discrepancy,  while  affecting 
the  extent  of  fluctuation,  will  not  change  its  general 
character. 

(2)  Since  December,  1917,  prices  have  risen  — 
at  first  considerably;  more  recently,  with  some  ap- 
proach to  violence,  and  without  any  symptom  of 
prospective  arrest  or  reversal.  Wholesale  prices 
were  14.3  per  cent,  higher  in  September,  1918,  than 
in  December,  19 17,  as  compared  with  no  advance 
whatever  for  the  preceding  seven  months ;  the  cor- 
responding percentage  for  "  lagging "  retail  food 
prices  was  13.4  per  cent,  as  compared  with  3.9  per 
cent,  for  the  earlier  period. 

This  advance  might  hypothetically  be  imputed  to 
an  increase  in  the  volume  of  currency  —  at  least  to 
the  extent  that  the  repressive  factors  (a  period  of  in- 
cubation and  price-fixing  activity)  operative  in  the 
preceding  months  should  after  December,  1917,  have 
ceased  to  the  same  extent  to  mask  or  counteract  the 
price-rising  tendency. 

As  to  the  period  of  incubation :  By  reasonable  al- 
lowance a  sufficient  time  would  have  elapsed  by  De- 
cember, 19 1 7,  to  permit  an  increase  in  the  volume 
of  currency  associated  with  our  war  borrowing  to 
begin  showing  itself  in  higher  prices.  Continuation 
of  this  currency  expansion  with  the  progress  of  cer- 
tificate borrowing  and  notably  with  the  increasing 


174  WAR  BORROWING 

resort  to  payment  by  credit  after  August,  191 7, 
would  accordingly  be  reflected  in  a  continuous  rise 
of  prices. 

As  to  the  Government's  price-fixing  activity :  In 
the  first  five  months  of  19 18  the  list  of  price  con- 
trolled commodities  was  steadily  extended.  The 
price  of  zinc  was  fixed  in  February ;  aluminum  in 
March ;  rubber,  hides  and  skin,  and  wool  in  May. 
Up  to  June,  1 91 8,  little  attempt  had  been  made  to 
regulate  the  prices  of  goods  in  higher  stages  of  fab- 
rication, control  being  exercised  primarily  over  the 
prices  of  raw  materials  or  of  materials  in  the  early 
stages  of  fabrication.  On  June  25,  1918,  however, 
the  price  of  harness  leather  was  fixed,  followed  by 
the  control  of  the  prices  of  a  large  number  of  classes 
of  cotton  goods,  beginning  on  July  i,  19 18;  and  later 
by  a  form  of  control  of  the  retail  prices  of  shoes. 
This  shift  in  the  character  of  price  control  in  June, 
1918,  is  apparently  indicative  of  a  feeling  in  the 
Price-Fixing  Committee  of  the  War  Industries 
Board  that  the  regulation  of  the  prices  of  raw  ma- 
terials was  not  in  itself  sufficient  to  retard  advances 
in  the  prices  of  fabricated  goods. 

The  actual  effect  of  the  public  control  of  prices  on 
the  level  of  prices  in  this  country  is,  of  course,  diffi- 
cult to  evaluate  because  of  the  large  number  of  fac- 
tors operating  on  the  prices  of  particular  commodi- 
ties. With  respect  to  raw  materials  and  of  ma- 
terials in  the  early  stages  of  fabrication  regulation 
seems  in  the  main  to  have  been  successful  in  check- 
ing any  further  upward  tendency  in  prices.  The  ef- 
fect of  control  of  the  prices  of  raw  materials  on  the 


THE  PRICE  LEVEL  175 

prices  of  the  finished  products  seems,  on  the  other 
hand,  not  to  have  been  very  great.  Of  the  ten 
groups  of  commodities  whose  prices  are  carried  by 
the  Bureau  of  Labor  Statistics,  the  largest  increases 
in  price  from  August,  1917,  to  August,  1918,  are 
found  in  the  cloths  and  clothing,  and  housefurnish- 
ings'  groups.  In  both  groups,  finished  products  pre- 
dominate. Some  of  these  finished  products,  how- 
ever, were  made  of  raw  materials  which  were  them- 
selves not  regulated,  so  that  the  rise  in  the  price  of 
the  fabricated  goods  was  due  partly  to  the  rise  in  the 
price  of  the  raw  material. 

The  analysis  of  fluctuations  of  controlled  and  un- 
controlled prices,  to  which  reference  has  already 
been  made,  may  be  profitably  examined  in  this  con- 
nection : 

1918  Controlled     Uncontrolled  All 

Jan 106  128  1 19 

Feb 107  129  119 

Mar 107  129  120 

Apr 108  133  122 

May  109  133  122 

June    109  13s  123 

July     Ill  140  128 

Aug no  145  130 

Sept 112  151  134 

It  appears,  in  striking  contrast  to  the  preceding 
period,  that  the  prices  of  controlled  commodities 
not  only  showed  no  decline  but  actually  registered 
an  increase  —  traceable  as  far  back  as  October, 
19 1 7.  This  rise  was,  however,  much  less  pro- 
nounced than  in  the  case  of  the  uncontrolled  group, 
and  to  that  extent  the  upward  course  of  the  "  all 


176  WAR  BORROWING 

commodities  "  movement  was  restrained.  But  as 
compared  with  the  effect  of  the  earlier  price  fixing 
the  difference  is  marked. 

There  is  thus  some  evidence  to  support  the  hypo- 
thesis that,  just  as  the  effective  price  fixture  of  basic 
materials  may  have  retarded  the  rise  in  commodity 
prices  in  the  first  half  of  our  war  financing,  so  the 
increase  in  the  prices  of  fabricated  goods  in  con- 
sequence of  unattempted  or  ineft'ective  price  fixture 
may  have  contributed  to  the  rise  of  the  index-num- 
ber of  commodity  prices  in  the  second  half.  In- 
deed, it  has  even  been  suggested  that  an  increase  in 
the  volume  of  currency  might  be  expected  to  make 
its  presence  felt,  even  in  face  of  a  group  of  price 
fixed  commodities,  by  "  a  geyser-like  ebullition " 
with  respect  to  the  prices  of  general  commodities 
not  so  controlled.  Until  however  the  detailed  study 
of  the  effect  of  price  fixing  on  prices  now  in  process 
in  the  Price  Section  of  the  Division  of  Planning  and 
Statistics  of  the  War  Industries  Board  shall  have 
been  completed,  any  final  conclusion  upon  this  mat- 
ter is  impossible. 

It  remains  to  inquire  whether  the  Treasury's  oper- 
ations have  been  directly  productive  of  that  abnor- 
mal increase  in  the  circulating  medium  —  credit  and 
currency  —  which  might  be  counted  upon  to  cause 
a  rise  in  general  prices.  Specifically  this  may  be 
phrased  as  the  query :  Have  the  issue  and  use  of 
certificates  of  indebtedness  been  the  direct  cause  of 
an  extraordinary  expansion  of  credit  or  increase  in 
currency  ? 

The  absolute  theory  of  short-term  borrowing  in 


THE  PRICE  LEVEL  177 

relation  to  banking  credit  can  be  briefly  set  forth, 
both  as  to  the  procedure  which  will  and  that 
which  will  not  result  in  credit  expansion  or  inflation. 
Let  us  assume  that  the  Treasury  uses  certificates  of 
indebtedness  as  the  borrowing  device  and  employs 
the  Federal  Reserve  Banks  as  its  fiscal  agents.  The 
loan  is  made  by  member  banks  and  other  financial  in- 
stitutions subscribing  to  the  issue  of  certificates  on 
their  own  behalf  or  for  their  customers,  and  re- 
mitting funds  or  transferring  credits  in  payment  to 
the  Federal  Reserve  Banks.  Such  remittances  are 
thereafter  either  held  by  the  Federal  Reserve  Banks 
as  government  deposits  until  disbursed  by  the  Treas- 
ury, or  are  redeposited  with  the  subscribing  banks 
duly  qualified  as  special  depositaries  until  required, 
when  they  are  again  remitted  to  the  Federal  Reserve 
Banks  for  subsequent  disbursement.  Against  such 
government  deposits  no  reserves  need  lawfully  be 
held. 

Under  the  simplest  conditions  payment  for  cer? 
tificates  will  have  been  made  by  a  subscribing  bank 
in  cash  or  in  current  exchange.  In  so  far  as  such 
payment  is  effected  without  any  increase  in  the  cash 
holdings  of  the  bank  or  any  reduction  in  the  ratio  of 
cash  holdings  to  deposits,  there  will  obviously  have 
been  no  increase  in  the  volume  of  credit.  With  re- 
spect to  subscriptions  on  its  own  account,  a  part  of 
the  bank's  resources  heretofore  loaned  to  private 
borrowers  will  now  be  loaned  to  the  govern- 
ment. With  respect  to  subscriptions  on  account  of 
customers  there  will  be  a  reduction  of  commercial 
deposits  and  an  increase  in  government  deposits. 
The  total  volume  of  deposits  subject  to  check  will 


178  WAR  BORROWING 

not  have  increased;  but  a  part  of  the  deposits  here- 
tofore to  the  credit  of  individuals  will  now  stand  to 
the  credit  of  the  Government.  Only  in  the  event  of 
customers  making  payment  in  cash  or  of  reserves 
being  in  the  first  instance  in  excess  of  lawful  re- 
quirement is  the  reduction  of  commercial  deposits 
in  consequence  of  certificate  payments  by  customers 
likely  to  be  repaired  by  further  discounts,  and  the 
volume  of  deposits  to  be  increased.  Nor  is  there 
likely  to  be  any  inflation  incident  to  the  liberation  in 
the  course  of  public  expenditure  of  government  de- 
posits of  this  kind.  The  credits  so  dispersed  will 
run  their  course  through  ordinary  banking  channels, 
eventually  into  loan  reductions,  deposit  increases, 
currency  withdrawals  —  but  only  to  a  compensatory 
or  alternative  degree.  Upon  the  maturity  of  the  cer- 
tificates the  Treasury,  presumably  put  in  funds  by 
the  receipt  of  tax  revenues  or  the  proceeds  of  funded 
loans  drawn  from  deposits  or  from  circulation,  will 
discharge  its  debt  to  the  banks  and  to  investors, 
thereby  restoring  deposits  and  circulation  to  the 
prior  state. 

The  assumption  that  the  banks  pay  for  certificates 
entirely  in  cash  and  current  exchange  is  however  un- 
real to  a  very  great  extent.  Credit  will  have  been 
used,  wholly  or  in  part,  and  the  results  that  may  be 
expected  are  notably  different.  The  subscribing 
banks  will  in  such  case  make  payment  for  certificates 
in  the  form  of  a  book  credit  or  government  deposit. 
The  actual  technique  will  include  qualification  by  the 
subscribing  bank  as  a  government  depositary  by  the 
hypothecation  of  approved  collateral,  and  the  trans- 
action will  be  effected  throughout  by  the  Federal  Re- 


THE  PRICE  LEVEL  179 

serve  Banks  as  fiscal  agents.  But  the  essence  of  the 
operation  will  be  the  creation  of  additional  credit  by 
the  subscribing  bank.  The  subscribing  ability  of  a 
bank  will  be  limited  —  in  the  absence  of  reserve  re- 
quirements against  such  government  deposits  — 
only  by  the  extent  that  it  must  be  in  a  position  to  meet 
withdrawals.  If  the  bank  is  able  by  rediscounting 
to  supply  a  credit  balance  at  the  Federal  Reserve 
Bank  or  to  secure  Federal  Reserve  notes  to  meet 
currency  withdrawals,  there  is  not  even  this  re- 
straint. The  first  step  of  the  borrowing  process  — 
in  so  far  as  the  banks  make  payment  for  certificates 
by  credit  —  is  the  creation  of  an  additional  volume 
of  credit  in  the  form  of  government  deposits. 

The  course  of  such  newly  created  credits,  when 
liberated  in  process  of  government  expenditure,  pre- 
sents the  same  variety  of  possibilities  heretofore 
noted.  Paid  over  to  the  public  creditors  (munition 
makers,  ship-builders,  etc.)  in  the  form  of  the 
Treasury's  drafts  upon  its  balances,  they  may  be  used 
by  the  recipients  to  discharge  maturing  loans,  to 
swell  deposit  accounts  or  to  obtain  additional  circu- 
lating medium.  In  the  first  event  the  inflation 
effected  will  be  limited  to  the  period  within  which  the 
government  deposits  were  dispersed ;  in  the  other 
cases  there  will  be  a  continuing  effect. 

The  final  stage  in  the  operation  will  be  the  tender 
of  some  part  of  the  certificates  in  settlement  of  bond 
subscriptions,  and  the  liquidation  of  the  remaining 
part  at  maturity  (unless  called  for  prior  redemp- 
tion) from  out  the  proceeds  of  taxes,  Liberty  Loans 
or  refunding  certificates.  If  these  new  proceeds  are 
obtained  from  savings  the  result  will  be   (a)    de- 


i8o  WAR  BORROWING 

flation,  if  liberated  government  deposits  have  gone  to 
swell  commercial  deposits,  or  (b)  actual  contraction, 
if  such  liberated  deposits  have  been  used  to  reduce 
existing  loans.  On  the  other  hand,  if  the  funds 
with  which  the  maturing  certificates  are  redeemed 
are  supplied  by  further  borrowing,  the  inflation  of 
credit  will  continue  —  to  the  original  amount  if  the 
liberated  deposits  have  been  absorbed  in  loan  repay- 
ment ;  to  a  correspondingly  greater  amount,  if  they 
have  been  dispersed  in  increased  commercial  de- 
posits. 

Let  us  turn  now  to  the  actual  movement  of  credit 
and  currency  during  the  period  of  short-term  bor- 
rowing. In  the  following  table  are  shown  (a)  the 
nominal  amount  of  certificates  of  indebtedness  issued 
each  month;  (b)  the  volume  of  government  deposits 
in  the  Federal  Reserve  Banks  and  in  the  special  de- 
positary banks  on  the  last  day  of  each  month;  (c) 
the  volume  of  individual  deposits  subject  to  check 
in  the  national  banks  at  the  "call  "  dates;  (d)  the 
volume  of  loans  and  discounts  of  the  national  banks 
at  the  "call"  dates;  (e)  the  amount  of  money  in 
circulation  at  monthly  intervals. 

The  volume  of  certificates  discloses  the  three 
phases  in  short-term  borrowing,  recurring  in  cyclical 
succession  :  ( i )  a  period  of  increase  or  active  issue 
in  anticipation  of  a  funded  loan,  (2)  a  period  of  con- 
stancy or  suspended  issue  during  the  flotation  of  the 
loan,  (3)  a  period  of  reduction  after  the  flotation  of 
the  loan,  by  funding  into  the  bonds  of  the  loan  or  by 
redemption  upon  or  before  maturity  from  out  the 
proceeds  of  the  loan.     With  the  progress  of  our  bor- 


THE  PRICE  LEVEL 


i8i 


Certifi- 

Govern- 

Individual 

Loans  and 

Money  in 

cates 

ment 

deposits 

discounts 

circulation 

issued 

deposits 

subject  to 

of  national 

(first  day 

during 

in  special 

check  of 

banks 

of  succeed- 

month 

deposi- 

national 

(call 

ing 

(1 

nominal) 

taries 

and 

Federal 

Reserve 

Banks 

(last  day) 

banks 

(call 

dates) 

dates) 

month) 

[000,000   omitted] 

I9I7  — 

April 

268 

III 

4736 

May 

4(X) 

206 

6627 

8751 

4731 

June 

200 

1020 

6560 

8818 

4850 

July 

none 

466 

4852 

August 

550 

492 

4799 

September 

700 

460 

6915 

9055 

4820 

October 

1070 

1016 

4924 

November 

691 

1822 

7208 

9535 

5085 

December 

none 

797 

7497 

9390 

5120 

1918  — 

January 

891 

828 

4965 

February 

1074 

987 

5092 

March 

653 

923 

7281 

9139 

5240 

April 

1 140 

874 

5318 

May 

183 

1414 

7309 

9260 

5246 

June 

839 

1500 

7161 

9620 

5384 

July 

1344 

1412 

.... 

5559 

August 

172. 

995 

7465 

9A92, 

5621 

September 

1264 

867 

5790 

October 

641 

1702 

5943 

rowing  these  phases  have  tended  to  overlap  and  to  be 
further  compHcated  by  the  issue  of  tax  anticipation 
certificates. 

Examining  the  above  table  in  connection  with  the 
data  as  to  the  successive  certificate  issues  elsewhere 
set  forth  (page  26)  it  appears  that  in  the  first  cycle, 
the  nominal  volume  of  certificates  issued  increased 


i82  WAR  BORROWING 

from  $50,000,000  on  April  24,  to  $918,205,000  on 
June  9;  remained  fixed  at  $918,205,000  from  June 
9,  to  June  29,  and  declined  from  June  29,  until  com- 
pletely redeemed  by  July  30.  In  the  second  cycle, 
resort  was  had  again  to  certificates  on  August  9. 
The  amount  issued  rose  uninterruptedly  from  $300,- 
000,000  to  $2,320,493,000  on  October  24;  remained 
fixed  at  that  amount  from  October  24  to  November 
15,  and  declined  with  maturity  and  redemption  of 
issues  from  November  15  to  December  15.  In  the 
third  cycle,  the  volume  of  certificates  rose  from 
$400,000,000  on  January  22,  1918,  to  $3,012,085,- 
500  on  April  22,  1918;  remained  constant  from 
April  23  to  May  9,  1918,  at  $2,612,085,500;  and  de- 
clined thereafter  until  complete  maturity  on  July  18, 
19 18,  overlapping  the  resumption  of  certificate  bor- 
rowing in  anticipation  of  the  Fourth  Liberty  Loan. 
In  the  fourth  cycle,  certificate  borrowing  began  on 
June  25,  1918,  with  an  issue  of  $839,646,500  and 
continued  with  fortnightly  issues  until  October  i, 

19 1 8,  at  which  time  there  had  been  emitted  $4,659,- 
820,000  with  maturities  extending  up  to  January  30, 

19 19.  There  were  no  emissions  immediately  before 
nor  during  the  flotation  of  the  Fourth  Liberty  Loan 
in  October,  19 18,  after  which  followed  the  usual 
funding  and  redemption. 

The  volume  of  government  deposits  in  the  banks 
and  trust  companies  designated  as  special  deposi- 
taries and  in  the  Federal  Reserve  Banks  reflects  the 
course  of  certificate  borrowing,  with  the  modification 
at  intervals  due  to  Liberty  Loan  and  income  and 
excess  profits  tax  payments  and  to  the  progressive 
increase  of  withdrawals  for  public  expenditure  and 


THE  PRICE  LEVEL  183 

for  advances  to  the  Allies.  ^'^  From  our  entry  into 
the  war  through  April,  May  and  early  June  the  vol- 
ume of  such  deposits  rose  moderately  as  certificate 
borrowing  progressed  until  the  extraordinary  in- 
crease in  late  June  due  to  income  tax  receipts  and  the 
Liberty  Loan  overpayment.  This  plethora  dimin- 
ished in  July  and  early  August,  up  to  the  resumption 
of  certificate  borrowing  in  mid-August.  There- 
after, the  volume  of  government  deposits  followed 
closely  the  course  of  such  borrowing,  rising  with 
each  issue  and  declining  in  the  intervals  but  mount- 
ing with  the  heavier  issues  of  late  October  up  to  the 
flotation  of  the  Second  Liberty  Loan.  The  enor- 
mous overpayment  of  November  20  dominated  the 
situation  until  the  end  of  the  calendar  year,  after 
which  the  systematized  certificate  borrowing  in  an- 
ticipation of  the  Third  Liberty  Loan  more  than  kept 
pace  with  heavier  expenditure.  The  Treasury's  de- 
posits rose  from  late  January  through  February. 
March  and  April  until  the  Third  Liberty  Loan  flo- 
tation. The  large  overpayment  of  the  May  28 
Loan  installment  again  resulted  in  distention,  and 
this  had  not  entirely  passed  away  before  the  Treas- 
ury's continuing  policy  of  a  mounting  balance  in- 
duced recourse  to  certificate  borrowing.  From  June 
25  to  October  i,  19 18,  the  Government's  deposit  ac- 
count exhibited  the  usual  crest  and  hollow  form  in- 
cident to  certificate  borrowing,  modified  to  some  ex- 
tent in  mid-August  by  an  apparently  deliberate  re- 
duction of  the  Treasury  balance  to  a  lower  level. 
The  movement  of  bank  credits  in  relation  to  cer- 

^''  Compare  the  course  of  the  daily  "  net  balance  "  of  the 
Treasury  during  the  period  under  review   (frontispiece). 


1 84  WAR  BORROWING 

tificate  borrowing  can  be  traced  with  a  moderate  but 
by  no  means  conclusive  degree  of  success  from  the 
data  as  to  the  condition  of  the  national  banks  avail- 
able at  the  nine  "call"  dates:  May  i,  June  20, 
September  11,  November  20  and  December  31,  19 17, 
and  March  4,  May  10,  June  29  and  August  31,  19 18. 
Of  these  dates  no  less  than  three  —  June  20,  1917, 
November  20,  1917,  and  May  10,  1918 —  fall  in  the 
midst  of  Liberty  Loan  flotations,  with  accompanying 
complexity  and  exception  in  banking  operations. 
The  result  is  to  impair  the  serviceableness  of  the  call 
data  in  six  out  of  the  eight  intervals,  only  the  spans 
December  31,  1917  —  March  4,  1918,  and  June  29 
—  August  31,  1918,  being  free  from  such  disturb- 
ance. Moreover,  three  of  the  call  dates  —  Septem- 
ber II,  1917,  June  29,  1918,  and  August  31,  1918, 
are  "  mid-period  "  rather  than  terminal,  with  the  re- 
sult of  making  the  intervals  to  which  they  belong  less 
serviceable  for  the  present  purpose.  This  affects 
both  issue  and  redemption  periods.  As  to  the  issue 
periods:  (i)  on  September  11,  19 17,  of  the  six 
issues  of  certificates  aggregating  $2,320,493,000  in 
anticipation  of  the  Second  Liberty  Loan,  only  two 
issues,  aggregating  $550,000,000  had  been  emitted ; 
(2)  on  August  31,  19 1 8,  of  the  seven  issues  of  cer- 
tificates aggregating  $4,659,820,000  in  anticipation 
of  the  Fourth  Liberty  Loan,  only  four  issues  aggre- 
gating $2,760,141,500  had  been  emitted  and  of  these 
one  issue  to  the  amount  of  $839,646,500  had  been 
emitted  before  the  preceding  call  date  (June  29, 
19 18),  in  comparison  with  which  the  inquiry  is  to  be 
made.  As  to  redemption  periods :  with  respect  to 
June  29,  19 1 8,  of  the  six  issues  aggregating  $3,012,- 


THE  PRICE  LEVEL  185 

085,500  in  anticipation  of  the  Third  Liberty  Loan, 
two  issues  aggregating  $1,140,153,000  matured  at 
subsequent  dates  while  the  first  two  issues  aggregat- 
ing $900,000,000  had  matured  before  the  preceding 
call  date. 

Subject  to  these  limitations,  the  three  intervals 
May  i-June  20,  1917,  December  31,  1917- 
March  4,  19 18,  and  June  29- August  31,  191 8, 
may  be  used  to  study  the  issue  periods  of  the  first, 
third  and  fourth  cycles  respectively.  For  the  issue 
period  of  the  second  cycle  there  is  no  such  aid  — 
September  11,  1917,  being  a  "mid-period"  date. 
The  material  is  scantier  with  respect  to  the  redemp- 
tion periods.  The  interval  November  20-December 
31,  19 1 7,  serves  adequately  for  the  second  cycle. 
But  for  both  the  first,  June  20-September  11, 
1917,  and  the  second  cycle,  May  lo-june  29,  1918, 
we  have  "  mid-period  "  dates  as  terminals,  while  the 
redemption  period  of  the  fourth  cycle  lies  still  in  the 
future.  It  thus  appears  that  some  measure  of  sta- 
tistical verification  is  possible  with  respect  to  three 
out  of  the  four  issue  periods  and  with  respect  to  only 
one  out  of  the  four  redemption  periods. 

First,  as  to  issue  periods  :  In  the  first  cycle  (May 
i-June  20,  1917,)  the  volume  of  individual  deposits 
subject  to  check  declined  from  $6,627,833,000  to  $6,- 
560,268,000  or  $67,565,000;  the  volume  of  loans 
and  discounts  increased  from  $8,751,679,000  to  $8,- 
818,312,000  or  $66,633,000  and  the  amount  of 
"money  in  circulation"  increased  (May  i-July  i, 
19 1 7,)  from  $4,736,841,963  to  $4,850,359,720  or 
$113,517,757.  There  was  thus  a  small  reduction  of 
deposits  and  a  moderate  expansion  of  loans  —  both 


i86  WAR  BORROWING 

conceivably  accounted  for  by  an  increase  on  the 
volume  of  money  in  circulation^^ — with  no  evi- 
dence that  the  creation  of  government  deposits  was 
at  the  expense  of  existing  individual  deposits. 

In  the  third  cycle  (December  31,  1917-March 
4,  191 8)  the  volume  of  individual  deposits  subject 
to  check  declined  from  $7,497,821,000  to  $7,281,- 
753,000  or  $216,068,000;  the  volume  of  loans  and 
discounts  declined  from  $9,390,836,000  to  $9,139,- 
225,000  or  $251,611,000;  and  the  amount  of  money 
in  circulation  decreased  (January  i-March  i, 
1918)  from  $5,120,424,908  to  $5,092,530,682  or 
$27,894,226.  The  accompaniment  of  certificate  ab- 
sorption was  thus  a  reduction  in  the  volume  of  com- 
mercial discounts  and  of  checkable  deposits,  substan- 
tial in  amount  but  notably  less  than  the  volume  of 
government  deposits  created  within  the  period. 

In  the  fourth  cycle  (June  29-August  31,  191 8) 
the  volume  of  individual  deposits  subject  to  check 
rose  from  $7,161,368,000  to  $7,465,681,000  or 
$304,313,000;  the  amount  of  government  deposits 
declined  from  $1,037,787,000  to  $506,583,000  or 
$531,204,000;  the  volume  of  loans  and  discounts  de- 
clined from  $9,620,402,000  to  $9,493,666,000  or 
$126,736,000;  and  the  amount  of  money  in  circula- 
tion increased  (July  i-September  i,  1918,)  from 
$5,384,797,000  to  $5,621,311,000  or  $236,514,000. 
Thus  during  the  two  months  in  which  the  Treasury 
was  borrowing  heavily  by  fortnightly  issues  of  cer- 
tificates of  indebtedness  there  was,  far  from  any  re- 
duction, a  notable  increase  both  in  checkable  deposits 

18  Federal  Reserve  Bulletin,  July,  1918,  p.  664. 


THE  PRICE  LEVEL  187 

and  in  money  in  circulation.  This  expansion  is  not 
to  be  explained  on  the  score  of  loan  created  deposits 
—  there  having  been  a  substantial  reduction  in  the 
loan  account  —  but  must  be  at  least  considered  in 
connection  with  the  marked  decline  in  government 
deposits. 

Second,  as  redemption  periods :  In  the  second 
cycle  (November  20-December  31,  191 7,)  the 
volume  of  checkable  deposits  increased  from  $7,208,- 
406,000  to  $7,497,821,000  or  $289,415,000;  the  vol- 
ume of  loans  and  discounts  decHned  from  $9,535,- 
527,000  to  $9,390,836,000  or  $144,691,000;  and  the 
amount  of  money  in  circulation  increased  (Novem- 
ber I,  1917-January  I,  1918,)  from  $4,924,928,- 
348  to  $5,120,424,908  or  $195,496,560.  There  was 
thus  for  the  period  a  large  increase  of  deposits,  de- 
spite a  sharp  contraction  in  loans  and  a  heavy  with- 
drawal of  currency. 

It  is  possible  to  supplement  the  foregoing,  in  the 
case  of  the  third  cycle  and  to  a  less  extent  in  the 
case  by  the  fourth  cycle  by  an  examination  of  the  op- 
erations of  the  "  member  banks  in  leading  cities."  as 
reported  weekly  to  the  Federal  Reserve  Board  after 
December  7,  19 17.  The  issue  period  of  the  third 
cycle  extended  from  January  22  to  April  22,  1918. 
The  deposits  and  investments  of  the  banks  at  approx- 
imately the  corresponding  dates  are  shown  in  the  fol- 
lowing table : 

January  25        April  26 

Number  of  reporting  banks 671  681 

Net  demand  deposits  on  which  re- 
serve is  computed    $8,892,320,000  $9,100,089,000 

Government  deposits  485,086,000       669,352,000 


i88  WAR  BORROWING 

January  25  April  26 

United  States  securities  owned  1^.     1,069,395,000  2,178,252,000 
Loans  secured  by  U.  S.  bonds  and 

certificates     374,276,000  316,352,000 

All  other  loans  and  investments. .     9,967,941,000  9,907,521,000 

It  appears  that  during  the  fourteen  weeks  in  which 
the  Treasury  placed  the  six  issues  of  certificates  in 
anticipation  of  the  Third  Liberty  Loan,  to  a  nominal 
aggregate  of  $3,012,085,500,  the  reporting  member 
banks  acquired  and  retained  something  more  than 
$1,100,000,000  certificates  of  indebtedness  —  with- 
out allowance  for  any  possible  reduction  by  distribu- 
tion and  sale  of  their  holdings  of  Liberty  bonds. 
This  huge  investment  was  unaccompanied  by  any  re- 
duction in  the  banks'  commercial  deposits,  the  vol- 
ume of  net  demand  deposits  on  which  reserve  is  com- 
puted actually  increasing  in  the  period  $207,769,000. 
Such  additional  deposits  were  not  however  loan- 
created.  Banking  restraint  appeared  in  a  net 
liquidation  of  loans  secured  by  government  obliga- 
tions and  in  a  moderate  reduction  of  other  loans  and 
investments.  On  the  other  hand,  of  the  great  vol- 
ume of  government  deposits  created  in  the  period  by 
certificate  borrowing,  only  $184,266,000  remained  in 
the  banks  as  additional  public  deposits.  It  is  to  the 
"  dispersed  "  residue  that  the  moderate  increase  in 
commercial  deposit  accounts,  as  well  as  some  part  of 
the  increase  in  the  outstanding  volume  of  currency, 
may  be  imputed. 

The  issue  period  of  the  fourth  cycle  extended  from 
June  25   to  October   i,    1918,   within  which  were 

19  Certificates  of  indebtedness  were  not  disassociated  from 
other  government  obligations  until  the  statement  of  February 
21,  1918. 


THE  PRICE  LEVEL  189 

emitted  $4,659,820,000  certificates  of  anticipation  of 
the  Fourth  Liberty  Loan  and  during  which  there 
were  liquidated  the  outstanding  parts  of  two  issues 
in  anticipation  of  the  Third  Liberty  Loan  of  the 
original  nominal  aggregate  of  $1,069,053,000.  The 
deposits  and  investments  of  the  "  member  banks  in 
leading  cities  "  at  the  corresponding  dates  were  as 
follows : 

June  28  October  4 

Number  of  reporting  banks 705  749 

Net  demand  deposits  on  which  re- 
serve is  computed   $9,117,565,000  $9,521,346,000 

Government  deposits    1,211,992,000       693,650,000 

United  States  certificates  of  in- 
debtedness            621,868,000     1,746,135,000 

Loans  secured  by  U.  S.  bonds  and 
certificates    498,830,000       493,164,000 

All  other  loans  and  investments.    10,539,986,000  10,521,821,000 

Of  the  certificates  issued  by  the  Treasury  within 
these  three  months,  the  banks  retained  out  of  their 
allotments  $1,124,267,000.  This  investment  was 
unaccompanied  by  any  reduction  of  commercial  de- 
posits, the  volume  of  demand  deposits  subject  to  re- 
serve requirements  actually  increasing  $403,781,000. 
Nor  were  such  additional  deposits  loan-created,  the 
banks'  loans  and  other  investments  showing  a  slight 
reduction.  A  substantial  amount  of  the  certificate 
borrowings,  as  well  as  of  the  earlier  government 
deposits,  would  seem  again  to  have  been  "  dis- 
persed "  and  to  have  reappeared  in  the  increased 
volume  of  commercial  deposits  and  money  in  cir- 
culation. 

The  effects  of  the  redemption  period,  extend*ing 
from  April  22  to  July  18,  19 18,  within  which  the  six 


I90  WAR  BORROWING 

certificate  issues  in  anticipation  of  the  Third  Liberty- 
Loan  matured,  cannot  be  as  satisfactorily  traced 
from  the  data  available.  The  first  period  of  the  span 
includes  the  installment  payments  of  the  Third  Lib- 
erty Loan,  while  the  second  period  overlaps  the  re- 
sumption of  certificate  borrowing  in  anticipation  of 
the  Fourth  Liberty  Loan.  If,  in  order  to  eliminate 
the  first  complication,  the  first  two  issues  be  omitted 
and  the  redemption  period  be  narrowed  to  May  28 
-July  18  we  still  have  to  do  with  the  facts  that 
within  this  period  three  issues  of  Third  Liberty 
Loan  certificates  to  the  nominal  amount  of  $1,612,- 
085,500  matured,  and  two  issues  of  Fourth  Liberty 
Loan  certificates  to  the  nominal  amount  of  $1,599,- 
084,500  were  emitted,  making  a  net  reduction  of 
$13,001,000.  In  addition  six  issues  of  tax-antici- 
pation certificates  to  the  nominal  amount  of  $1,624,- 
403,500  matured  on  June  25,  1918. 

Within  the  seven  weeks  the  loans  and  investments 
of  the  banks  underwent  the  following  changes: 

May  31  July  19 

Number  of  reporting-  banks 689  718 

Net  demand  deposits  on  which  re- 
serve is  computed $9,025,495,000  $8,919,235,000 

Government  deposits   909,312,000  602,803,000 

United  States  Certificates  of  in- 
debtedness owned  1,041,878,000  527,461,000 

Loans  secured  by  U.  S.  bonds  and 

certificates    512,962,000  473,616,000 

Other  loans  and  investments 10,004,162,000  10,535,197,000 

Redemption  and  distribution  of  certificates  are 
here  reflected  in  a  decline  of  the  banks'  holdings  of 
certificates  of  $514,417,000  and  a  reduction  of  gov- 
ernment deposits  of  $306,509,000.     No  part  of  the 


THE  PRICE  LEVEL  191 

credits  so  released  went  to  swell  commercial  deposits, 
the  volume  of  net  deposits  on  which  reserve  is  com- 
puted actually  declining  $106,260,000.  On  the  other 
hand  the  banks  increased  their  investments  other 
than  in  United  States  bonds  and  certificates  and  in 
loans  secured  by  such  obligations,  by  $531,035,000. 
Some  part  of  this  expansion  was  probably  due  to 
"  loans  and  other  investments  made  in  the  form  of 
currency,  of  which  increasing  amounts  remain  out- 
side the  banks  in  the  pockets  of  the  people."  ^'^  The 
remainder  can  perhaps  be  best  accounted  for  as 
short-term  investments  made  by  the  banks  in  prepa- 
ration for  renewed  war  borrowing,  in  face  of  a 
stringent  administrative  policy  toward  the  conserva- 
tion of  credit. 

A  reasonable  interpretation  of  the  foregoing  ex- 
hibits, imperfect  and  inconclusive  as  they  are,  would 
seem  to  be  the  following:  Certificate  borrowing  has 
involved  the  creation  of  additional  bank  credits  in 
the  form  of  government  deposits  rather  than  the 
transfer  to  the  new  government  account  of  existing 
commercial  credits.  In  so  far  as  there  has  been 
restraint  upon  the  expansion  of  commercial  borrow- 
ing, it  has  been  due  to  the  reluctance  of  the  banks  to 
increase  commercial  loans  and  discounts  during  a 
period  of  heavy  government  short-term  borrowing 
culminating  in  a  Liberty  Loan,  and  to  the  pressure 
put  by  the  banks  upon  commercial  borrowers,  under 
like  conditions,  to  apply  incoming  funds  to  the 
liquidation  of  existing  loans.  The  primary  stage  in 
the  process  has  thus  been  an  expansion  of  credit  in 

20  Federal  Reserve  Bulletin,  July,  1918,  p.  664. 


192  WAR  BORROWING 

the  form  of  government  deposits,  unrelieved  by  a 
corresponding  reduction  of  commercial  deposits. 

This  expansion  has  not  been  self -correcting. 
With  the  cessation  of  certificate  issues  and  the  com- 
pletion of  the  loan  flotation  —  involving  payment 
and  redemption  of  outstanding  certificates  —  the 
banks  have  tended  to  become  less  urgent  creditors 
and  more  liberal  lenders.  The  volume  of  com- 
mercial deposits  and  the  amount  of  money  in  cir- 
culation have  tended  to  increase  to  a  slight  extent 
from  more  active  commercial  discounting  by  the 
banks,  but  to  a  very  marked  degree  from  the  accumu- 
lation in  individual  deposit  accounts  of  government 
credits  liberated  in  the  course  of  public  expenditures. 
The  second  stage  in  the  process  has  thus  been  the  dis- 
persion among  commercial  deposit  accounts  of  the 
volume  of  credit  traceable  to  the  certificate  issues 
and  a  withdrawal  of  some  part  of  such  deposits  for 
additional  circulation. 

These  movements  —  credit  expansion  in  the  pri- 
mary stage  and  credit  dispersion  in  the  secondary 
stage  —  have  been  recurrent  in  the  four  successive 
cycles  of  our  war  borrowing,  and  they  have  been 
cumulative  in  result,  -^ 

21  It  will  be  found  interesting  to  compare  with  the  above  the 
similar  conclusions  reached  in  England  as  to  the  like  policies 
there  pursued ;  see  Hartley  Withers,  "  Our  Money  and  the 
State"  (London,  1917),  pp.  60-67;  "Second  Report  from  the 
House  of  Commons  Select  Committee  on  National  Expendi- 
ture" (December  13,  1917),  sect.  18-19,  and  Lord  Cunliffe's 
Report  on  Currency  and  the  Foreign  Exchanges  (reprinted  in 
Federal  Reserve  Bulletin,  December,  1918). 


THE  FUTURE 


VI 

THE  FUTURE 

In  undertaking  to  estimate  the  war  borrowing  policy 
of  the  United  States  at  this  time,  two  purposes 
govern  —  suggestion  and  criticism.  In  the  first 
place,  the  Treasury  faces  the  necessity  of  further 
large  scale  borrowing  even  after  the  cessation  of 
actual  fighting,  with  the  consequent  possibility  that 
the  lessons  of  the  past  may  induce  some  change  in 
the  practices  of  the  future.  In  the  second  place,  at- 
tention may  properly  be  directed  in  objective  criti- 
cism even  at  this  early  date  to  certain  phases  of  our 
borrowing  activity  which  as  tested  by  historical  pre- 
cedent, by  theoretical  analysis  and  by  positive  result 
may  be  fairly  described  as  unwise. 

It  is  certain  that  the  aftermath  of  the  war  from 
which  the  United  States  is  now  gradually  emerging 
will  call  for  further  use  of  public  credit.  This  has 
been  recognized  as  a  requirement  of  national  de- 
mobilization and  has  been  incorporated  into  the  fiscal 
program  of  the  administration.  It  is  equally  certain 
that  the  sums  to  be  raised  by  borrowing  in  the  next 
twelve  months,  though  less  relative  to  the  total 
budget,  will  attain  large  proportions.  The  total 
cash  disbursements  of  the  United  States  in  the  fiscal 
year  ending  June  30,  19 18,  were  something  under 
$13,000,000  of  which  about  two-thirds  were  secured 

195 


196  WAR  BORROWING 

by  loans.  For  the  fiscal  year  ending-  June  30,  19 19, 
the  Secretary  of  the  Treasury  had  asked  that  pro- 
vision be  made  for  an  expenditure  of  $24,000,000,- 
000,  of  which  $16,000,000,000  should  be  secured  by 
loans.  The  deficiency  appropriation  bill  of  October 
19 18  added  some  $6,300,000,000  to  the  amounts  be- 
fore estimated  as  necessary  to  the  conduct  of  the 
government  during  1918-19.  With  a  little  less 
than  $7,000,000,000  available  in  nominal  aggregate 
from  the  Fourth  Liberty  Loan,  and  with  $9,000,- 
000,000  as  the  assumed  yield  of  the  new  war  revenue 
bill,  there  would  have  remained  to  be  provided  be- 
fore July  I,  1 9 19  —  had  the  original  program  of 
expenditure  been  carried  out  —  approximately  $15,- 
000,000,000.^ 

In  so  far  as  the  earlier  termination  of  the  war 
has  permitted  scaling  down  of  budgetary  estimates  it 
is  likely  that  substantial  reduction  will  be  made  in 
taxation  as  well  as  in  borrowing.  Definite  an- 
nouncement has  already  been  made  of  a  Fifth  Lib- 
erty Loan  exceeding  in  nominal  amount  any  one  of 
the  first  three  Loans,  and  it  is  not  unlikely  that  the 
future  may  require  even  further  commitments  of 
this  kind. 

How  are  these  huge  sums  to  be  provided  ?  Shall 
the  Treasury  continue  as  its  chief  reliance  the  same 
borrowing  procedure  used  in  the  first  phase  of  the 
war  —  short-term  loans  from  the  banks  by  the  is- 
sue of  certificates  of  indebtedness  fundable  into  or 
liquidated  out  of  the  proceeds  of  long-term  bond 
issues  absorbed  by  popular  subscription?  Or  shall 
some  alternative  device  be  employed  which  will  en- 

1  Federal  Reserve  Bulletin,  November,  1918,  p.  1045. 


THE  FUTURE  197 

sure  the  advantages  and  avoid  the  disadvantages  of 
certificate  borrowing  with  the  result  of  net  gain 
to  the  Treasury,  the  business  world  and  the  general 
public? 

The  direct  advantages  of  certificate  borrowing  as 
a  fiscal  expedient  lie  in  its  ease  and  its  economy. 
When  coupled,  as  it  has  been  during  the  past  year, 
with  permissive  payment  by  credit,  with  exemption 
of  government  deposits  from  reserve  requirements 
and  with  ample  rediscount  facilities,  a  mechanism  is 
provided  whereby  the  Treasury  may  supply  itself 
with  practically  unlimited  funds  without  difficulty, 
unpopularity  or  delay.  Certificate  issues  in  this  way 
offer  all  the  administrative  convenience  of  fiat 
money.  Indeed  certificate  borrowing  so  conducted 
might  be  described  as  fiat  credit.  In  the  one  case 
demand  notes  passing  by  tender,  in  the  other  case 
government  deposits  disbursable  by  check  are  created 
by  legislative  mandate  or  administrative  order  and 
made  available  for  public  expenditure,  subject  only 
to  the  wisdom  of  the  Treasury  and  the  cooperation 
of  the  subscribing  banks. 

It  is  true  that  demand  notes  do  not  require  con- 
current action  by  the  banks  and  that  they  are  free 
from  a  definite  term  of  maturity.  But  these  differ- 
ences are  more  apparent  than  real.  A  banking  com- 
munity aligned  for  patriotic  service  under  the  lead- 
ership of  the  Federal  Reserve  Banks  may  be  ex- 
pected to  work  in  the  fullest  accord  with  the  Treas- 
ury program,  and  the  ease  with  which  a  maturing 
issue  of  certificates  may  be  renewed  or  reissued  re- 
moves the  old-time  inconvenience  of  short-term  bor- 
rowing.    It  has  been  the  policy  of  the  Treasury  to 


198  WAR  BORROWING 

avoid  the  necessity  of  such  renewal  or  reissue  and 
to  provide  for  the  liquidation  of  the  certificates  by 
the  flotation  of  long-term  loans.  But  this  is  a  sequel 
to,  rather  than  a  condition  of  certificate  borrowing, 
comparable  to  a  deliberately  contemplated  funding 
loan  with  regard  to  w^hich  demand  notes  are  issued 
and  out  of  which  they  are  eventually  extinguished. 
Heretofore,  the  Treasury  has  floated  bond  issues 
enough  in  volume  and  frequency  to  discharge  the 
intervening  certificate  issues,  without  appreciable 
recourse  to  renewal  and  without  undue  reliance  upon 
bank  absorption  and  credit  payment.  It  is  likely 
that  the  maintenance  of  this  policy  has  operated  to 
restrain  the  issue  of  certificates  however  easy  the 
process  of  emission,  precisely  as  the  definite  contem- 
plation of  a  refunding  operation  would  check  the 
issue  of  demand  notes.  But  subject  to  such 
restraint,  certificate  borrowing  like  fiat  money  con- 
stitutes an  almost  effortless  mode  of  supplying  the 
Treasury  with  resources  in  the  amounts  and  at  the 
times  needed  for  public  expenditure. - 

The  objection  to  demand  notes  as  a  fiscal  ex- 
pedient lies  in  the  fact  that  their  proper  use  calls 
for  a  degree  of  wisdom  and  reserve,  if  not  super- 
human, at  least  beyond  that  self-control  which  any 
modern  state  has  been  able  to  muster  to  the  service 
of  its  exchequer.     Were  a  state  to  issue  inconvertible 

2  It  is  impossible,  however,  to  neglect  the  significance  of  the 
lengthening  "  overlap,"  that  is,  the  extent  to  which  the  ma- 
turities of  the  certificates  of  one  cycle  extend  into  the  issue 
period  of  the  succeeding  cycle.  Taken  in  conjunction  with 
the  heavy  over-paj'ment  of  the  first  installments  on  account  of 
loan  subscriptions,  and  the  small  use  of  certificates  as  com- 
pared with  payment  by  credit,  such  procedure  verges  close 
upon  certificate  refunding. 


THE  FUTURE     -  199 

paper  money  only  to  the  extent  and  for  the  duration 
of  its  extraordinary  requirements  and  thereafter  ex- 
ercise the  same  economy  in  expenditure  that  it  would 
have  practiced  under  a  system  of  taxation  or  fund- 
ing, the  expedient  would  be  ideal  in  its  simplicity  and 
economy.  If  the  amount  so  issued  even  though  for 
legitimate  purpose  were  so  large  as  to  cause  infla- 
tion and  high  prices  there  would  result  social  in- 
justice, and  this  consideration  in  itself  might  be 
enough  to  disqualify  the  whole  procedure.  But  in 
so  far  as  the  Treasury  is  concerned  —  until  such 
time  as  the  public  expenditure  had  felt  the  full  effect 
of  inflated  prices  —  fiat  money  would  be  an  ideally 
easy  and  painless  mode  of  supplying  the  exchequer. 

As  a  matter  of  fact,  however,  demand  notes  if  not 
utterly  discredited,  at  least  rest  under  the  gravest 
doubt  as  a  fiscal  expedient  by  reason  of  the  great 
likelihood,  attested  by  the  experience  of  state  after 
state  that  has  lapsed  into  their  use,  that  once  resort 
has  been  had  thereto  all  the  old  canons  of  economy 
and  prudence  are  gradually  weakened  and  the  Treas- 
ury drifts  insensibly  into  a  course  of  unchecked  and 
wasteful  expenditure.  Issue  succeeds  issue;  there 
develops  unwillingness  to  resort  to  taxation  or  fund- 
ing and  the  descent  to  inflation  and  depreciation  be- 
comes swift  and  easy.  ^ 

Theoretically,  however,  there  need  be  no  such 
lapse.  A  state  might  issue  demand  notes  within 
strictly  defined  and  inviolably  maintained  limits, 
might  exercise  the  most  rigid  economy  in  the  dis- 
bursement of  the  funds  so  provided,  and  might 
within  a  reasonable  season  liquidate  such  issues  from 
out  the  proceeds  of  loans  or  taxes.     The  historic 


200  -WAR  BORROWING 

procedure  used  by  the  Governor  of  Guernsey  in 
building  the  market  hall  of  his  town  by  an  issue  of 
town  notes,  subsequently  redeemed  from  out  of 
market  rentals  may  not  be  capable  of  general  adop- 
tion.^ But  this  is  because  of  the  defects  of  human 
nature  rather  than  the  unsoundness  of  the  device. 

The  fiscal  possibilities  of  certificate  borrowing  un- 
der existing  banking  conditions  offer  an  exact  par- 
allel. As  a  painless  mode  of  supplying  and  replen- 
ishing the  Treasury  with  available  funds,  the  certifi- 
cate of  indebtedness  may  encourage  laxity  or  ex- 
travagance in  public  expenditure  ;  but  it  need  not  nec- 
essarily do  so.  Kept  within  the  bounds  imposed  by 
periodic  redemption  from  out  the  proceeds  of  sav- 
ings-paid long-term  loans,  the  funds  provided  by 
certificate  borrowing  are  likely  to  be  expended  with 
neither  greater  nor  less  liberality  than  other  bor- 
. rowed  sums. 

The  recent  experience  of  the  United  States  has 
been  much  of  this  kind.  Certificate  borrowings  have 
kept  the  Treasury  in  funds  without  the  legislative  de- 
lay, the  administrative  burden,  and  the  popular  agi- 
tation inevitably  incident  to  taxation  and  funding. 
There  is  no  evidence  to  conclude  that  the  presence  of 
ample  resources,  readily  procured,  has  encouraged 
public  extravagance  or  laxity.  Indeed,  our  effec- 
tiveness both  in  direct  preparation  for  the  national 
defense  and  in  credit  advances  to  the  Allies  has  prob- 
ably been  greater  by  reason  of  the  readiness  and 
adequacy  of  our  war  chest.  Had  the  war  been  long 
prolonged  it  is  possible  that  with  progressive  increase 

^  Jevons,  "Money  and  the  Mechanism  of  Exchange"  (New 
York  edition,  1876),  p.  204;  lately  cited  by  Withers,  "Our 
Money  and  the  State"  (London,  1917),  p.  57- 


THE  FUTURE  201 

in  cost,  less  regard  would  have  been  had,  in  accord- 
ance with  the  rule  of  "  easy  come,  easy  go,"  for 
economy  and  restraint  in  public  expenditure  under 
a  regime  of  certificate  borrowing  than  under  one  of 
direct  funding.  All  that  may  be  ventured  is  that 
here  again  the  fortunate  issue  of  events  has  saved 
us  from  the  test. 

On  the  other  hand,  the  economies  of  certificate 
borrowing  have  been  less  in  actual  experience  than 
theoretical  analysis  would  suggest.  As  to  interest 
cost,  the  rates  borne  by  the  issues  in  anticipation  of 
the  First  and  Second  Liberty  Loans  were  in  the 
main  the  same  as  the  rates  of  the  respective  Loans, 
while  the  issues  in  anticipation  of  the  Third  and 
Fourth  Liberty  Loans  actually  bore  a  higher  rate 
than  that  of  the  Loans  themselves.  More  impor- 
tant, the  conspicuous  economy  of  short-term  borrow- 
ing —  avoidance  of  treasury  plethora  —  was  in  con- 
siderable part  lost  by  the  early  adoption  and  con- 
tinued use  of  the  policy  of  a  mounting  Treasury 
balance. 

All  in  all,  it  would  appear  that  although  the  fiscal 
advantages  of  certificate  borrowing  may  have  been 
less  than  the  maximum  suggested  by  hypothetical 
analysis,  they  have  nevertheless  been  great  —  per- 
haps enough  to  justify  continued  use  of  the  expedi- 
ent, were  direct  fiscal  effectiveness  the  sole  con- 
sideration. 

But  the  interest  of  the  Treasury,  although  the 
paramount,  is  not  the  exclusive  purpose  of  a  fiscal 
device  even  in  war  times.  The  effects  upon  the 
business  life  of  the  nation  and  upon  the  economic 
well-being  of  its  citizens  enter  so  largely  into  ac- 


202  WAR  BORROWING 

count  that  a  policy,  which  on  fiscal  grounds  might 
be  impeccable,  would  yet  be  properly  passed  over  in 
favor  of  some  alternative  measure. 

The  actual  effect  of  certificate  borrowing  upon 
the  business  life  of  the  country  as  attested  by  the 
state  of  the  money  market  has  seemingly  been  the 
avoidance  of  strain  and  fluctuation  to  a  very  re- 
markable degree.  But  this  stabilizing  effect  is  to 
be  imputed  not  to  the  particular  borrowing  device 
which  has  been  employed  but  to  the  credit  mechan- 
ism which  statute  and  administrative  policy  have 
provided  for  use  in  conjunction  therewith.  Per- 
missive payment  by  credit,  exemption  of  govern- 
ment deposits  from  reserve  requirement,  rediscount 
facilities  with  the  Federal  Reserve  Banks  —  and  not 
any  virtue  inherent  in  or  peculiar  to  certificate  bor- 
rowing have  saved  the  capital  market  from  the  dis- 
location which  might  have  been  anticipated  in  a 
period  of  war  borrowing.  Given  this  same  mech- 
anism properly  adjusted  to  the  changed  condition 
and  the  same  monetary  stability  might  be  expected 
to  attend  any  other  or  at  least  some  other  borrowing 
device. 

The  effect  of  certificate  borrowing  upon  the  eco- 
nomic well-being  of  the  citizen  body  is  more  difficult 
of  demonstration.  The  usual  barometer  —  the  in- 
dex number  of  commodity  prices  —  shows  that 
prices  remained  stable  during  the  first  half  of  the 
war  borrowing  period,  and  advanced  sharply  during 
the  second  half.  The  constancy  of  the  first  phase 
may  be  ascribed  to  the  interval  that  must  elapse  be- 
fore the  full  effect  of  any  abnormal  increase  in  the 
volume  of  credit  will  show  itself  in  higher  prices, 


THE  FUTURE  203 

and  to  the  further  fact  that  the  course  of  prices  of 
many  commodities  entering  into  the  index  number 
was  affected  directly  or  sympathetically  by  govern- 
ment price  fixture.  The  sharp  rise  of  commodity 
prices  in  the  second  phase  may  be  supposed  to  have 
resulted  from  the  expiration  of  the  period  of  in- 
cubation and  the  confinement  of  price  fixing  activity 
to  basic  materials. 

Turning  from  the  evidence  of  the  index-number  as 
at  present  available,  to  the  factor  —  an  extraordi- 
nary increase  in  the  volume  of  a  credit  —  which  in 
the  absence  of  counteracting  elements  is  assumed  to 
bring  about  such  a  rise  in  prices,  the  exhibit  is  un- 
mistakable. Certificate  borrowing  has  involved  the 
creation  of  a  huge  volume  of  additional  bank  credit 
in  the  form  of  government  deposits  and  there  has 
been  no  corresponding  contraction  or  deflation  in- 
cident to  the  liquidation  or  funding  of  the  certificate 
issues. 

To  sum  up :  The  use  of  certificates  of  indebtedness 
has  made  it  possible  for  the  Treasury  to  supply  its 
fiscal  requirements  with  great  ease  and  with  reason- 
able although  not  maximum  economy  and  without 
any  traceable  evidence  of  laxity  or  extravagance. 
In  the  money  market,  the  accompaniment  of  certifi- 
cate borrowing  has  been  a  remarkable  absence  of 
strain  or  dislocation;  but  this  is  imputable  to  the 
associated  credit  mechanism  rather  than  to  any 
specific  quality  of  the  certificates.  Finally,  a  direct 
and  unmistakable  effect  of  certificate  borrowing  has 
been  the  creation  of  a  large  volume  of  banking  credit 
in  the  form  of  government  deposits  subsequently  dis- 
persed  in   the   course   of   government   expenditure 


204  WAR  BORROWING 

without  succeeding  contraction  by  certificate  liquida- 
tion. 

Both  in  estimating  our  experience  and  in  antici- 
pating our  requirement,  the  question  thus  presents 
itself :  Is  it  possible  to  fashion  a  borrowing  device 
which  will  secure  the  gain  and  avoid  the  loss  iden- 
tified with  the  use  of  certificates  of  indebtedness? 
Specifically,  this  means  a  procedure  which  will  offer 
like  advantage  to  the  Treasury,  will  leave  the  money 
market  as  free  from  strain  and  will  save  the  price 
mechanism  from  credit  inflation. 

The  program  which  would  seem  fairly  to  meet 
these  several  requirements  is  —  to  the  extent  that 
recourse  must  be  had  to  loans  —  an  initial  issue  of 
anticipatory  short-term  certificates  of  indebtedness  to 
put  the  Treasury  in  immediate  funds,  followed  by  a 
succession  of  long-term  bond  issues  designed  in 
technique  for  popular  absorption,  payable  in  evenly 
distributed  serial  installments  and  sufficient  in  aggre- 
gate amount  both  to  extinguish  existing  short-term 
indebtedness  and  to  obviate  further  interim  bor- 
rowing. The  loans  might  be  issued  either  in  con- 
tinuing "  over  the  counter "  sale  or  be  floated  in 
periodic  "  drive  "  campaigns.  In  the  case  of  con- 
tinuing sale,  a  less  number  of  installments  would 
be  required  inasmuch  as  offerings  might  be  sus- 
pended whenever  the  influx  of  funds  became  ex- 
cessive. The  effectiveness  of  this  procedure  can 
best  be  examined  by  assuming  a  specific,  though  hy- 
pothetical instance. 

Let  us  assume,  in  initiation  of  the  procedure,  the 
flotation  of  a  Liberty  Loan  at  the  earliest  date 
deemed  opportune  after  the  declaration  of  hostilities, 


THE  FUTURE  205 

anticipated  to  the  extent  necessary  by  the  emission  of 
certificates  of  indebtedness.  The  aggregate  amount 
of  the  Loan,  as  allotted,  should  be  enough  to  dis- 
charge the  anticipatory  certificates  then  outstanding 
and  to  supply  the  Treasury  with  funds  sufficient  to 
obviate  further  short-term  borrowing  prior  to  the 
flotation  of  a  succeeding  Liberty  Loan.  Of  this 
principal  amount  there  should  be  payable,  by  the 
terms  of  subscription,  a  percentage  forthwith  or 
soon  after  allotment,  from  the  proceeds  of  which 
all  outstanding  certificates  should  be  liquidated  or 
redeemed.  The  remaining  percentage  of  the  sub- 
scription should  be  payable  in  equal  monthly  in- 
stallments, with  the  intention  of  maintaining  a 
comfortable  Treasury  balance  until  the  flotation  of 
the  next  loan.  In  succeeding  loans,  with  no  pro- 
vision needed  for  outstanding  certificates,  the  en- 
tire principal  should  be  paid  in  such  monthly  in- 
stallments. No  over-payment  or  anticipated  pay- 
ment of  installments  should  be  authorized. 
Should  special  exigency  require  the  issue  of  an- 
ticipatory certificates  of  indebtedness  between  any 
two  loans,  the  next  succeeding  loan  should  be  early 
enough  in  flotation  and  large  enough  in  amount  to 
extinguish  such  indebtedness  and  to  provide  funds 
sufficient  to  carry  the  Treasury  through  the  follow- 
ing interval. 

The  fiscal  advantages  of  this  procedure  would 
be  as  marked  as  in  the  case  of  certificate  bor- 
rowing. The  labor  and  expense  of  the  loan  cam- 
paign would  come  at  the  beginning  instead  of  as 
at  present  at  the  end  of  the  borrowing  cycle,  and 
there  would  be  an  entire  saving  of  the  adminis- 


2o6  WAR  BORROWING 

trative  cost  incident  to  the  certificate  issues.  The 
Treasury  balance  would  be  kept  more  uniform  or 
at  least  be  saved,  barring  extraordinary  occurrence, 
from  that  alternate  plethora  and  depletion  which 
the  certificate  method  has  not  been  able  entirely  to 
avoid.  The  interest  charge  would  be  no  greater  — 
less  indeed  by  the  extent  to  which  a  lower  rate 
might  continue  to  be  used  for  the  bonds  than  for 
the  certificates. 

As  to  the  money  market,  there  need  be  no  more 
strain  or  disturbance  incident  to  an  installment  loan 
than  to  certificate  borrowing.  The  stabilizing 
quality,  we  have  seen,  resides  in  the  credit  mechan- 
ism offered  by  the  Federal  Reserve  Banks  and  not 
in  any  peculiar  virtue  of  the  borrowing  device. 
If  the  installment  quotas  should  correspond  in  vol- 
ume and  interval  with  the  certificate  issues,  there 
would  in  the  first  instance  be  like  requisition  upon 
the  capital  supply.  The  pace  of  public  expenditure 
would  be  the  same  under  the  two  systems,  and 
there  would  be  like  redeposit  of  borrowed  funds  in 
subscribing  banks  qualified  as  depositaries.  Be- 
yond this,  should  the  occasion  arise,  the  stabilizing 
measures  provided  by  the  Federal  Reserve  System 
in  connection  with  certificate  borrowing  —  discount 
and  rediscount  facilities  —  would  likewise  be 
available  under  the  alternative  system.  The  need 
might  be  less,  but  the  remedy  would  be  as  ready. 

With  respect  to  general  well-being,  the  chief 
merit  of  the  installment  bond,  as  compared  with 
the  certificate  of  indebtedness,  lies  in  the  possibility 
it  offers  of  effecting  our  war  borrowing  without 
the  creation  of  the  huge  volume  of  additional  bank 


THE  FUTURE  207 

credit  which  if  not  directly  responsible  for  infla- 
tion and  rising  prices  must  at  least  be  regarded  as 
contributory  thereto.  This  wholesale  creation  of 
new  credit  results  primarily  from  the  fact  that  the 
essence  of  successful  certificate  borrowing  is  the 
absorption  of  the  certificate  issues  by  the  banks  and 
the  use  of  payment  by  credit  in  settlement.  There 
need  be  no  counterpart  to  this  in  installment  bond 
borrowing.  In  connection  with  each  installment 
payment  there  will  doubtless  be  some  expansion  of 
credit  by  the  banks  in  the  form  of  loans  to  bor- 
rowing subscribers,  and  some  rediscount  by  mem- 
ber banks  with  the  Federal  Reserve  Banks  in  con- 
nection with  the  remittance  of  installment  pay- 
ments. But  this  also  occurs  under  certificate  bor- 
rowing —  in  connection  with  the  funding  loan 
flotation  —  as  a  secondary  form  of  credit  expan- 
sion. Moreover  in  the  case  of  installment  loans, 
it  will  occur  only  to  the  extent  that  the  prime  pur- 
pose of  such  borrowing  —  payment  from  out  of 
savings  rather  than  out  of  credit  —  is  unrealized, 
and  will  represent  in  so  far  the  short-coming  and 
not  the  essence  of  the  procedure. 

It  thus  appears  that  an  installment  loan,  as  com- 
pared with  certificate  borrowing,  would  be  as  ef- 
fective and  probably  more  economical  in  supply- 
ing the  Treasury's  needs ;  it  would  cause  as  little 
strain  and  dislocation  to  the  money  market  —  and 
this  of  a  kind  which  the  general  credit  apparatus  of 
the  country  could  correct;  and  it  would  be  directly 
responsible  for  a  notably  less  expansion  of  banking 
credit  with  its  theatening  vista  of  inflation  and 
rising  prices.     Compared  item  for  item  installment 


2o8  WAR  BORROWING 

loan  borrowing  repeats  the  important  advantages 
and  avoids  the  conspicuous  disadvantages  of  cer- 
tificate borrowing. 

But  there  is  a  further  advantage  in  favor  of  the 
installment  loan  as  contrasted  with  certificate  bor- 
rowing —  the  check  upon  popular  non-essential  ex- 
penditure. A  glaring  fact  in  the  war  experience  of 
the  United  States,  as  of  every  belligerent  state,  has 
been  the  imperfect  appreciation  of  the  doctrine 
that  national  effectiveness  means  spending  less, 
quite  as  much  as  producing  more,  and  that  every 
unit  of  productive  force  required  in  supplying  dis- 
pensable needs : —  every  ounce  of  raw  material, 
fuel,  convertible  machinery  engaged  in  making 
things  and  services  without  which  we  can  subsist 
is  just  so  much  reduction'  of  the  nation's  war 
power. 

Much  has  been  said  and  written  of  the  usefulness 
of  heavy  taxation  in  war  finance  in  correcting  this 
tendency,  and  such  is  undoubtedly  the  case  if 
taxation  be  widely  distributed.  That  part  of  the 
national  income  surrendered  to  the  state  in  tax- 
ation which  would  otherwise  have  been  needlessly 
consumed  effects  a  corresponding  release  of  pro- 
ductive energ}'-  for  the  national  defense.  But  it  is 
equally  certain  that  the  same  result  can  attend 
borrowing  and  that  the  largest  part  of  that  which 
the  Treasury  receives  from  loans  can  come  from 
the  income  rather  than  from  the  credit  of  those 
who  subscribe  to  ^  bonds.  This  is  the  distinction 
between  "  credit  loans  "  and  "  savings  loans."  If 
bonds  are  paid  for  out  of  current  income  that 
would  otherwise  have  been  spent  upon  non-essen- 


THE  FUTURE  209 

tials,  the  result  is  the  same,  as  to  the  release  of  in- 
dustrial labor  and  capital  for  war  service,  as  though 
this  sum  had  been  taken  in  taxation.  Indeed  to 
the  extent  that  the  war  taxes  are  of  so  restricted  a 
kind  and  rest  in  the  main  upon  so  limited  a  class 
that  payments  will  be  effected  by  the  aid  of  bank 
loans  or  at  the  expense  of  further  savings,  there 
is  strong  likelihood  that  the  resultant  curtailment 
of  unnecessary  production  will  be  less  than  that 
growing  out  of  a  widely  distributed  bond  issue  paid 
for  out  of  current  savings. 

The  final  test  of  a  fiscal  expedient  —  preemi- 
nently in  war  financing — is  the  likelihood  of  its 
success.  Is  the  direct  absorption  of  an  installment 
payable  bond  issue  of  the  needed  volume  —  even 
a  succession  of  issues  extending  well  beyond  the 
war  —  within  such  reasonable  bounds  as  to  justify 
trial.  The  answer  will  rest  upon  our  estimate  of 
the  economic  resource  and  the  patriotic  response 
of  American  citizenry.  As  to  the  first,  an  install- 
ment loan  makes  no  greater  requisition  upon  the 
income  of  the  nation  than  a  certificate  funding 
loan  of  like  amount,  payable  to  like  extent  from 
out  of  savings.  Whatever  doubt  there  may  be  on 
this  score  therefore  has  to  do  with  the  total  sum 
obtainable  by  borrowing  rather  than  with  the  par- 
ticular manner  of  obtaining  it.  The  Treasury  in 
its  wisdom  will  determine  the  amount  that  may 
reasonably  be  obtained  by  borrowing  from  the 
national  income,  and  only  the  borrowing  device  is 
a  matter  of   choice. 

There  remains  the  possibility  of  popular  disfavor 


2IO  WAR  BORROWING 

towards  installment  payment.  Some  encourage- 
ment for  this  view  would  seem  to  be  afforded  by 
the  large  proportions  of  the  four  Liberty  Loans 
paid  "  in  full  "  upon  allotment  or  upon  the  first 
installment  date.  But  we  have  no  knowledge  as 
to  in  how  far  this  overpayment  was  influenced  by 
the  acquiescence  of  the  Treasury  and  carried  out 
by  the  cooperation  of  the  banks.  Of  the  number 
and  volume  of  subscriptions  made  nominally  in 
accordance  with  the  terms  of  the  loan,  but  actually 
paid  by  the  subscribers  through  the  banks  in  weekly 
or  monthly  installments  —  we  have  no  available 
data.  It  is  probable  that  a  considerable  part  of  the 
great  army  of  new  subscribers  to  each  succeeding 
loan  were  either  secured  through  or  at  any  rate 
availed  themselves  of  these  facilities.  Installment 
payment  is  a  familiar  procedure  in  American  mid- 
dle-class economy,  and  the  recent  successful  ad- 
vocacy of  its  use  in  connection  with  income  and 
excess  profits  taxation  suggests  its  wider  con- 
venience. With  installment  payment  incorporated 
into  the  essential  plan  of  the  loan  and  with  the 
whole  weight  and  energy  of  the  loan  campaign 
expended  in  its  behalf,  the  results  would  be  reason- 
ably secure. 

The  entire  course  of  our  war  financing  has  been 
an  impressive  exhibit  of  popular  response.  That 
more  than  21,000,000  subscribers'*  could  be  en- 
rolled  for  a  Fourth  Liberty  Loan  or  that  14,472 

*  Some  uncertainty  has  existed  as  to  wliether,  in  this  as  in 
earlier  loans,  the  aggregate  refers  to  "  subscribers  "  or  "  sub- 
scriptions"; but  all  doubt  is  removed  by  the  explicit  use  by 
the  Secretary  of  the  Treasury  on  November  i,  1918.  of  "  sub- 
scribers "  (Federal  Reserz^e  Bulletin,  November,  1918,  p.  1045). 


THE  FUTURE  211 

financial  institutions  could  be  induced  to  participate 
in  certificate  purchase  have  been  developments  far 
beyond  every  estimate  based  upon  past  experience. 
It  is  not  too  much  to  anticipate  a  like  favorable  re- 
sult in  this  particular.  Certificate  borrowing  has 
the  virtue  of  familiar  use;  installment  payment, 
the  handicap  of  novelty.  But  the  issue  is,  on  the 
one  hand,  between  a  manner  of  demand  borrow- 
ing effected  through  the  direct  expansion  of  bank 
credit  with  mischief  making  possibilities  of  in- 
flation and  rising  prices;  and,  on  the  other  hand,  a 
mode  of  direct  funding  which  will  supply  the 
Treasury's  needs  from  the  savings  of  its  citizenry 
with  the  accompaniment  of  restrained  expenditure 
and  a  heritage  of  new  thrift.  If  there  be  any  risk 
in  the  venture  it  would  surely  seem  worth  the 
taking. 


THE  END 


INDEX 


Adams,  H.  C,  98  n. 

Balance,  Treasury,  course  of, 
76;  theory  of,  99;  policy  of 
mounting,  100,  201. 

Banks,  Federal  Reserve,  cer- 
tificates held  by,  27;  credit 
facilities  of,  144;  discount 
operations  of,  149. 

Banks,  member,  certificates 
held  by,  61 ;  operations  in 
leading  cities,  187. 

Banks,  savings,  certificates 
held  by,  59  n. 

Bayley,  R.  A.,  9  n. 

Bullock,  C.  J.,  9n. 

Certainty,  as  a  requisite  of 
war  borrowing,  95. 

Certificates  of  indebtedness, 
advantages  of,  107,  197;  al- 
ternatives to,  204 ;  banks 
holdings  of,  61 ;  dangers  of, 
104;  disadvantages  of,  198; 
earlier  use  of,  8;  economy 
of,  200;  fiat  credit  and,  197; 
investors'  holdings  of,  61 ; 
issue  of,  27,  180;  issue  pe- 
riods of,  185 ;  meaning  of 
term,  7;  New  York  banks' 
subscriptions  to,  62 ;  origin 
of,  30;  psychological  disad- 
vantage of,  103 ;  ratio  to 
loans,  59;  redemption  peri- 
ods, 187 ;  use  in  loan  sub- 
scription payments,  68. 

Chase,  Secretary,  16,  17. 
Clark,  W.  C,  168. 


Constitution,  Federal,  bor- 
rowing power  under,  9. 

Control,  price,  development 
of,  170;  extent  of,  172. 

Credit,  expansion  of,  176 ;  in- 
flation of,  179,  191 ;  pay- 
ment by,  37,  64,  139;  war 
borrowing  and,  177. 

Credit  loans,  160. 

Crisis,  of  1837,  11;  of  1857, 
14;  of  1907,  18. 

Cunliffe  Report,  192  n. 

Currency,  increase  in  volume 
of,  176. 

iCurtiss,  F.  H.,  62  n.,  143. 

Depositary  banks,  earlier  use 
of,  126;  increase  in  number 
of,  129,  137. 

Deposits,  government,  course 
of,  182;  creation  of,  141; 
dispersion  of,  179,  191. 

Dewey,  D.  R.,  9,  20-21. 

Discount  operations,  of  Fed- 
eral Reserve  Banks,  145, 
149. 

Dispersion  of  government  de- 
posits, 179,  191. 

Economy,    as    a    requisite    of 

war  borrowing,  96. 
England,  influence  of,  30. 
Elxposure,  period  of,  169. 

Federal  Reserve  Banks,  ab- 
sorption of  certificates  by, 
29;  discount  operations  of, 
14s. 


213 


214 


INDEX 


Fiat  credit,  197. 
Fisher,  I.,  168. 

Hamilton,  A.,  10. 
Harding,  W.  P.  G.,  119. 

Income  Tax,  certificates  in 
anticipation  of  1917,  27;  of 
1918,  56;  of  1919,  56. 

Incubation,    period    of,     167, 

173- 

Index  number  of  prices,  164; 
effect  of  price  control  upon, 
172,  175- 

Inflation,  meaning  of,  163 ; 
war  borrowing  and,  157. 

Installment  loans,  205 ;  effect 
upon  money  market  of,  206 ; 
effect  upon  non-essential 
production,  208;  effect  up- 
on prices,  207 ;  practicabil- 
ity of,  210. 

Invasion,  period  of,  169. 

Investors,  certificates  held  by, 
61. 

Jevons,  W.  S.,  200. 

Kemmerer,  E.  W.,  126,  164. 
Knox,  J.  J.,  9, 

Liberation  of  government  de- 
posits, 179. 

Liberty  Loan,  certificates  in 
anticipation  of.  First,  29; 
Second,  35;  Third,  44; 
Fourth,  52 ;  overpayment  of 
installments  of,  67. 

Miller,  A.  C,  163. 
Minnesota  memorial,  158. 
Mitchell,  W.  C,  16,  116. 
Money  Committee,  118. 
Money  market,  effect  of  cer- 
tificates upon,  109;  fluctua- 


tions in,   120;   influence  of 
Federal     Reserve     System 
upon,  121 ;  strain  upon,  114. 
ivloney,  rates  of,  116. 

New  York,  certificates  taken 
by  banks  of,  62;  money 
rates  in,  116. 

Nicholson,  J.  S.,  168. 

Olceowski,  L.,  76. 
Overpayment,  of  loan  install- 
ments, 67. 

Pigou,  A.  C,  157-158,  160. 

Prices,  certificate  borrowing 
and,  157 ;  control  of,  172- 
175;  course  of,  170;  incu- 
bation period  as  to,  169 ; 
index  number  of,  164. 

Quota  books  of  Federal  Re- 
serve Banks,  49. 

Readiness,  as  a  requisite  of 

war  borrowing,  94. 
Redeposit    of    public    funds, 

126. 
Repurchase  agreements,  60. 
Resale  agreements,  60. 
Revenue,  War,  Act  of   1917, 

28. 

Savings  loans,  160. 
Scott,  W.  R.,  3. 
Scott,  W.  A.,  159. 
Sprague,  O.  M.  W.,  158. 
Stewart,  W.  W.,  172. 

Treasury  operations,  74. 
Treasury  balance,  course  of, 
76;  mounting,   lOO,  201. 

War,  short-term  borrowing 
in,  of  1912,  10;  of  Mexican, 


INDEX  215 

13;  of  Civil,  17;  of  Span-  War  paper,  147,  152. 

ish-American,  18.  Willis,  H.  P.,  147,  148. 

Warburg,  P.,  163.  Wilson,  President,  30. 

War    financing,    current    dis-  Withers,  H.,  192  m.,  200. 

cussion  as  to,  1-2;  criteria  Wolman,  L.,  170. 

of,  94. 


FEINTED    IN    THE    UNITED    STATES    OF    AMEHICA 


'T'HE  following  pages  contain  advertisements  of  a  few 
of  the  Macmillan  books  on  kindred  subjects. 


Budget  Making  in  a 
Democracy 


A  NEW  VIEW  OF  THE  BUDGET 
By  EDWARD  A.  FITZPATRICK,   Ph.D., 

Draft  Administrator  of  Wisconsin,  Director  of  the  Society  for 
the  Promotion  of  Training  for  Public  Service. 

Cloth,  12°,  $1.50 

"  If  the  public  will  read  this  book  it  may  possibly  be  stirred 
to  a  greater  exertion  of  pressure  in  this  humanly  important 
part  of  its  business." — Neiu  York  Sun. 

The  volume  is  one  of  wide  social  appeal,  presenting,  in  fact, 
a  new  view  of  the  budget.  National  and  state  legislators  will 
be  especially  interested  in  the  way  in  which  the  author  brings 
the  budget  problem  into  direct  relation  to  our  fundamental 
democracy.  Social  workers  will  be  interested  in  the  author's 
definite  recognition  of  the  expanding  and  dynamic  character  of 
our  social  organization  and  the  outlining  of  a  budget  program 
that  helps  rather  than  hinders  such  programs.  Lawyers  will 
be  interested  in  the  rather  startling  problems  raised  by  the 
application  of  a  budget  system  to  the  courts.  Students  of 
political  science,  and  all  citizens  concerned  about  reconstruc- 
tion after  the  war.  will  be  interested  in  this  illuminating  dis- 
cussion of  an  admittedly  pressing  political  problem  whose  solu- 
tion is  essential  as  a  preliminary  to  effective  reconstruction 
after  the  war. 

The  table  of  contents  is  as  follows :  The  Budget  and 
Economy,  The  Budget  —  The  Essence  of  Government,  The 
Executive  Budget,  Budget  Proposals,  The  Budget  and  the 
Administration,  The  Legislature  and  the  Budget,  Legislative 
Organization  and  the  Budget,  The  Pork  Barrel  Problem,  Pork 
—  The  Remedies,  The  Executive  Veto,  The  Courts  and  the 
Budget. 


THE  MACMILLAN  COMPANY 

Publishers      64-66  Fifth  Avenue      New  York 


Foreign  Financial  Control 
In  China 

By  T.  W.  OVERLACH 

Cloth,  12°,  $^.00 

With  the  coming  of  peace,  China  re-enters  the  stage 
in  the  play  of  economic  and  pohtical  rivalries.  Lest 
these  rivalries  centering  in  China  end  in  war,  it  will 
be  necessary  for  all  the  powers  concerned  to  re-adjust 
their  specific  national  interests  and  view  points  on  the 
basis  of  mutual  respect  for  the  needs  and  aspirations 
of  all,  including  those  of  China. 

To  contribute  towards  such  international  conciliation 
is  the  aim  of  this  book.  It  presents  an  unbiased 
analyses  of  the  financial  and  political  activities  of  Great 
Britain,  Russia,  France,  Germany,  Japan  and  the 
United  States  in  China  during  the  last  twenty  years. 
It  adopts  a  sympathetic  view  and  attitude  towards 
all  the  powers  concerned  trying  to  give  justice  to  each, 
instead  of  seeing  things  through  the  colored  glasses 
of  national  ambitions.  And  it  emphasizes  the  need  of 
international  financial  cooperation. 


THE  MACMILLAN  COMPANY 

Publishers     64-66  Fifth  Avenue     New  York 


The  Value  of  Money 


By  B.  M.  ANDERSON,  Jr.,  Ph.D. 

Assistant  Professor  of  Economics,  Harvard  University 
Author  of  "  Social  Value  " 


Cloth,  i2mo,  $2.2$ 


Convinced  of  the  fact  that  the  value  of  money  cannot  be  studied  suc- 
cessfully as  an  isolated  problem,  the  author  of  this  text  considers  virtually 
the  whole  range  of  economic  theory  in  connection  with  the  conclusions 
he  reaches  concerning  the  central  problem  of  this  book.  The  following 
topics  are  discussed:  the  general  theory  of  value;  the  role  of  money  in 
economic  theory  and  the  functions  of  money  in  economic  life;  the  value 
of  money  in  relation  to  the  law  of  supply  and  demand,  in  relation  to  the 
doctrine  of  cost  of  production,  and  in  relation  to  the  capitalization  theory; 
the  theory  of  the  values  of  stocks  and  bonds,  of  "  good  will,"  established 
trade  connections,  trade-marks,  and  other  "intangibles";  the  theory  of 
credit,  including  the  relations  of  credit  to  value  and  of  credit  to  money; 
the  causes  governing  the  volume  of  trade,  and  particularly  the  place  of 
speculation  in  the  volume  of  trade;  the  relation  of  "static"  economic 
theory  to  "  dynamic  "  economic  theory. 

In  addition  to  the  theoretical  matter,  which  is  keen,  original  and  most 
ably  presented,  there  is  a  large  amount  of  new,  unpublished,  practical 
material  regarding  the  workings  of  the  stock  market,  the  money  market, 
the  general  range  of  speculation  and  the  measurement  of  the  volume  of 
trade,  etc. 

The  book  will  be  of  interest  to  college  and  university  students,  espe- 
cially in  view  of  the  fact  that  the  economic  theory  which  it  advances  is 
a  challenge  to  the  existing  theories  on  the  subject. 


THE   MACMILLAN  COMPANY 

Publishers  64-66  Fifth  Avenue  New  York 


Income  Tax  Law  and  Accounting 

By  GODFREY  N.  NELSON 

Member  of  the  New  York  Bar,  Certified  Public  Accountant, 
State  of  New  York. 

New  Edition,  revised  and  enlarged.  Cloth,  72°,  $2.50 

Mr.  Nelson  defines  and  illustrates  Profits  and  Income,  Ex- 
penses and  Losses.  He  explains  in  detail  the  operation  and  ap- 
plication of  the  Income,  War  Income  and  Excess  Profits 
Taxes,  and  gives  examples  of  computing  the  taxes  as  applied 
to  individuals,  corporations  and  partnerships,  based  upon  the 
latest  rulings. 

The  text  suggests  rates  of  depreciation  for  various  classes 
of  business,  prescribes  remedial  measures  for  excess  deprecia- 
tion charged  off  in  previous  years,  and  outlines  methods  of 
bookkeeping  for  corporations  whereby  the  preparation  of  re- 
turns is  materially  simplified. 

Mr.  Nelson  has  secured  the  very  latest  decisions  of  the 
Treasury  Department,  and  has  incorporated  these  in  his  chap- 
ters. His  book  is  timely,  accurate,  up-to-date  and  will  be 
found  of  tremendous  value  as  a  guide  to  business  men,  law- 
yers, and  accountants  in  Income  Tax  matters. 

The  National  Budget  System 

By  CHARLES  WALLACE  COLLINS 

Cloth,  12°,  $1.25 

With  the  idea  of  the  budget  system  becoming  daily  more 
widely  diffused,  with  practically  the  unanimous  support  of  the 
business  interests  of  the  country  behind  it,  and  with  the  Pro- 
gressive, the  Republican,  and  the  Democratic  parties  pledged 
to  its  adoption,  a  clear  statement  of  the  principles  of  efficient 
budget  making  is  urgently  needed. 

Mr.  Collins  begins  his  work  with  a  review  of  the  present 
chaotic  methods  of  national  appropriation  and  expenditure. 
The  budget  system  is  then  described,  in  terms  of  plain  busi- 
nesslike procedure.  A  simple  plan  is  given  for  the  introduc- 
tion of  the  budget  system,  without  the  need  of  Constitutional 
amendment. 


THE  MACMILLAN  COMPANY 

Publishers      64-66  Fifth  Avenue     New  York 


MAY  1 4  W 


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